Department  of Health  and  Human  Services 
OFFICE  OF 
INSPECTOR  GENERAL 
Medicare  Reimbursement  for  Parenteral 
Nutrition 
JUNE  GIBBS  BROWN 
Inspector  General 
JULY 1997 
OEI-03-96-00230
I  OFFICE  OF INSPECTOR  GENERAL 
The  mission  of  the  Office  of Inspector  General  (OIG),  as mandated  by  Public  Law  95-

452,  is to protect  the  integrity  of the  Department  of Health  and  Human  Services  programs 

as well  as the  health  and  welfare  of beneficiaries  served  by  them.  This  statutory  mission 

is carried  out  through  a nationwide  program  of  audits,  investigations,  inspections, 

sanctions,  and  fraud  alerts.  The  Inspector  General  informs  the  Secretary  of program  and 

management  problems  and  recommends  legislative,  regulatory,  and  operational  approaches 

to  correct  them. 

Office  of Evaluation  and Inspections 
The  Office  of  Evaluation  and  Inspections  (OEI)  is one  of  several  components  of  the  Office 
of  Inspector  General.  It conducts  short-term  management  and  program  evaluations  (called 
inspections)  that  focus  on  issues  of concern  to the  Department,  the  Congress,  and  the 
public.  The  inspection  reports  provide  findings  and  recommendations  on  the  efficiency, 
vulnerability,  and  effectiveness  of  departmental  programs. 
OEIs  Philadelphia  Regional  Office  prepared  this  report  under  the  direction  of  Robert 
A.Vito,  Regional  Inspector  General.  Principal  OEI  staff  included: 
REGION  HEADOUARTERS 
Nancy  J.  Molyneaux,  Project  Leader  Jennifer  Antico,  Program  Specialist 

Cynthia  Hansford,  Program  Assistant  Brian  Ritchie,  TSS 

Daniel  Lai,  Intern 

Amy  Lin,  Intern 

Andrew  Peterson  Pharm.  D.,  Consultant 

OFFICE  OF AUDIT SERVICES 
Maritza  Hawrey  , Auditor 
To  obtain  a copy  of this  report,  call  the  Philadelphia  Regional  Office  at  l-800-531-9562.  EXECUTIVE  SUMMARY 
PURPOSE 
This  report  examines  Medicares  reimbursement  of  parenteral  nutrition  compared  to 

that  of  State  Medicaid  agencies,  Medicare  risk-contract  health  maintenance 

organizations  (HMOs),  and  manufacturers  charges  to  suppliers. 

BACKGROUND 
Medicare  Coverage of Parenteral Nutrition 
For  Medicare  beneficiaries  with  severe  permanent  disease  of  the  gastrointestinal  tract, 

parenteral  nutrition  may  be  the  only  way  to  receive  the  nutrients  they  need. 

Parenteral  nutrition  is a liquid  solution  provided  intravenously  through  use  of  an 

indwelling  catheter  and  a parenteral  nutrition  infusion  pump.  Parenteral  nutrition  is 

covered  under  Medicares  prosthetic  device  provision.  According  to  the  Medicare 

Carriers  Manual,  section  2130,  Medicare  covers  accessories  and/or  supplies  which  are 

used  with  a parenteral  device  to  achieve  the  therapeutic  benefit  of  the  device. 

Medicare  only  covers  parenteral  nutrition  for  beneficiaries  whose  gastrointestinal 

condition  (e.g.,  massive  bowel  resection)  permanently  prevents  them  from  absorbing 

the  nutrients  needed  to  maintain  weight  and  strength  commensurate  with  their  health 

status. 

According  to  the  Part  B Extract  and  Summary  System  (BESS),  Medicare  allowed  $163 

million  in  1995  for  parenteral  nutrition  solutions,  not  including  pumps  or  supplies. 

Eighty-nine  percent  of  this  was  for  just  four  procedure  codes  (B4189,  B4193,  B4197, 

and  B4199)  representing  pre-mixed  parenteral  solutions  with  varying  amounts  of 

protein.  See  Appendix  A  for  a complete  description  of  each  code. 

We  compared  Medicares  reimbursement  methodology  and  reimbursement  levels  for 

the  four  parenteral  nutrition  procedure  codes  with  the  highest  allowances  in  1995  with 

those  of  State  Medicaid  agencies  and  the  20 Medicare  risk-contract  HMOs  with  the 

highest  enrollments.  We  also  compared  Medicares  reimbursement  levels  with 

manufacturers  contract  prices  for  one  low-volume  parenteral  nutrition  supplier. 

FINDINGS 
Medicare  reimbursement for the four parenteral nutrition codes is an average of45 
percent  higher than lower-paying Medicaid  agencies. 
Thirty-two  of  the  49 Medicaid  agencies  that  responded  to  our  survey  were  able  to 
provide  at  least  some  pricing  information  on  the  four  selected  parenteral  nutrition 
procedure  codes.  Medicare  reimbursement  for  one  or  more  of  the  four  parenteral 
nutrition  codes  is higher  than  that  of  the  majority  of  these  32 agencies. 
i  Medicare  reimbursement for the four parenteral  nutrition codes is an average of 78 
percent  higher than lower-paying Medicare risk-contract HMOs. 
Ten  of  the  17 Medicare  risk-contract  HMOs  that  responded  to  our  survey  were  able 
to  provide  pricing  information  on  one  or  more  of  the  four  selected  parenteral  nutrition 
codes.  Medicare  reimburses  more  than  all  10 HMOs  for  one  or  more  of  the  four 
codes  examined. 
Medicare  reimbursement for the four parenteral nutrition codes is an average of 11 times 
higher than some manufacturers contract prices. 
Medicare  reimbursement  for  the  four  selected  codes  is between  9 and  12 times 
percent  higher  than  the  contracted  price  charged  by  three  manufacturers  to  a low-
volume  supplier  of  parenteral  nutrition. 
RECOMMENDATION 
HCFA  should examine other paymentmethodsthat could lead to more cost effective 
reimbursementfor parenteralnutritionsolutions. 
It  is clear  that  many  other  payers  reimburse  less  than  Medicare  for  parenteral 
nutrition.  In  addition,  suppliers  may  purchase  parenteral  nutrition  solutions  at 
discounted  prices  which  are  significantly  lower  than  Medicares  reimbursement  rates. 
We  urge  HCFA  to  pursue  one  or  more  of  the  following  options  to  bring  Medicares 
reimbursement  in  line  with  Medicaid  and  other  payers. 
Inherent  Reasonableness 
The  Secretary  or  the  DMERCs  can  use  their  inherent  reasonableness  authority  to 
reduce  reimbursement  to  more  appropriate  levels. 
Acquisition  Cost 
The  HCFA  could  base  its  reimbursement  on  suppliers  acquisition  costs.  There  is 
evidence  that  acquisition  costs  for  parenteral  nutrition  are  far  below  Medicares 
current  reimbursement  rate. 
Competitive  Bidding 
The  HCFA  could  seek  legislative  authority  to  use  competitive  bidding  to  take 
advantage  of  its  position  as  a high-volume  purchaser  of  parenteral  nutrition. 
ii  AGENCY  COMMENTS 
The  HCFA  concurred  with  our  recommendation.  The  HCFA  reported  that  they  have 
convened  a Workgroup  to  focus  on  ways  to  reduce  and  control  costs  for  parenteral 
nutrition.  The  HCFA  also  explained  that  the  Presidents  Fiscal  Year  1998  budget 
includes  proposals  to  give  carriers  the  authority  to  make  inherent  reasonableness 
adjustments  for  durable  medical  equipment,  to  eliminate  the  mark  up  for  drugs  and 
biologicals  and  include  acquisition  cost  in  the  reimbursement  calculation,  and  to 
authorize  the  Secretary  to  set  payment  rates  for  Part  B services  bases  on  competitive 
bidding. 
... 
111  TABLE  OF  CONTENTS 
PAGE 

EXECUTM3SUMMARY 

INTRODUCIION  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  1 

FINDINGS  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  4 

@Medicare  Reimburses  More  Than  Many  State 

Medicaid  Agencies  . . . . . . . . . . . . . . . . . . , . . . . . . . . . . . . . . . . . . . . . . . . . .  4 

*Medicare  Reimburses  More  Than  Many  Medicare 

Risk-Contract  HMOs  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  6 

@Medicare  Reimburses  Significantly  More  Than 

Manufacturers  Charge  Suppliers  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  8 

RECOMMENDATION  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  9 

ENDNOTES  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  10 

APPENDIX  A:  Definition  of  Procedure  Codes  . . . . . . . . . . . . . . . . . . . . . . . . .  A-l 

APPENDIX  B: Agency  Comments  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  B-l 
 INTRODUCTION 

PURPOSE 
This  report  examines  Medicares  reimbursement  of  parenteral  nutrition  compared  to 

that  of  State  Medicaid  agencies,  Medicare  risk-contract  health  maintenance 

organizations  (HMOs),  and  manufacturers  charges  to  suppliers. 

BACKGROUND 
For  Medicare  beneficiaries  with  severe  permanent  disease  of  the  gastrointestinal  tract, 

parenteral  nutrition  may  be  the  only  way  to  receive  the  nutrients  they  need. 

Parenteral  nutrition  is a liquid  solution  provided  intravenously  through  use  of  an 

indwelling  catheter  and  a parenteral  nutrition  infusion  pump.  The  solution  is usually 

composed  of  protein,  carbohydrates,  electrolytes,  multivitamins,  and  trace  elements. 

Beneficiaries  using  parenteral  nutrition  may  also  be  administered  fat  emulsions  (lipids) 

about  twice  a week. 

Medicare  Program 
Parenteral  nutrition  is covered  under  Medicares  prosthetic  device  provision. 

According  to  the  Medicare  Carriers  Manual,  section  2130,  Medicare  covers  accessories 

and/or  supplies  which  are  used  with  a parenteral  device  to  achieve  the  therapeutic 

benefit  of  the  device.  Medicare  only  covers  parenteral  nutrition  for  beneficiaries 

whose  gastrointestinal  condition  (e.g.,  massive  bowel  resection)  permanently  prevents 

them  from  absorbing  the  nutrients  needed  to  maintain  weight  and  strength 

commensurate  with  their  health  status,  Parenteral  nutrition  is only  covered  when 

administered  under  a doctors  order. 

As  of  October  1993,  the  Health  Care  Financing  Administration  (HCFA),  which 

administers  the  Medicare  program,  began  to  regionalize  the  processing  of  claims  for 

durable  medical  equipment,  prosthetics,  orthotics  and  supplies  (DMEPOS)  into  four 

Durable  Medical  Equipment  Regional  Carriers  (DMERCs).  Prior  to  this,  HCFA 

contracted  with  two  specialty  carriers  to  process  parenteral  nutrition  claims. 

Parenteral  nutrition,  as  a supply  used  with  a prosthetic  device,  is part  of  the 

DMERCs  claims  processing  responsibilities.  Establishing  the  DMERCs  was  part  of 

an  effort  by  HCFA  to  prevent  fraud  and  abuse  and  streamline  claims  processing.  The 

DMERCs  are  also  responsible  for  setting  the  reimbursement  amounts  based  on 

Medicare  guidelines. 

3 
 Medicare Allowances  for Parenteral Nutrition 
According  to  the  Part  B Extract  and  Summary  System  (BESS),  Medicare  allowed  $163 
million  in  1995  for  parenteral  nutrition  solutions,  not  including  pumps  or  supplies. 
Eighty-nine  percent  of  this  was  for  just  four  procedure  codes  (B4189,  B4193,  B4197, 
and  B4199)  representing  pre-mixed  parenteral  solutions  with  varying  amounts  of 
protein.  See  Appendix  A  for  a complete  description  of  each  code.  According  to  the 
Medicare  Coverage  Issues  Manual,  parenteral  nutrition  components  are  normally 
mixed  by  the  beneficiary  or  another  nonprofessional  person.  However,  Medicare  will 
cover  the  more  expensive  pre-mixed  solutions  if the  beneficiary  is unable  to  safely  or 
effectively  mix  the  solution  and  there  is no  family  member  or  other  person  who  can  do 
so.  In  1993  and  1994,  the  four  pre-mixed  solution  codes  represented,  respectively,  89 
and  81 percent  of  all  allowances  for  parenteral  nutrition  solution. 
Medicare Reimbursement  Methodology 
Medicare  establishes  reimbursement  for  23 procedure  codes  related  to  parenteral 
nutrition.  Medicare  uses  the  reasonable  charge  methodology  to  determine  the 
allowances  for  each  parenteral  nutrition  code.  The  reasonable  charge  which  is used  in 
determining  the  allowed  amount  for  a particular  procedure  code  is the  lowest  of: 
1.  the  actual  charge  as  submitted  on  the  claim; 
2.  the  suppliers  customary  charge; 
3.  the  prevailing  charge; 
4.  the  lowest  charge  level  (LCL);  or 
5.  the  inflation  index  charge  (IIC). 
According  to  the  Omnibus  Budget  Reconciliation  Act  of  1986,  reimbursement  levels 
for  parenteral  nutrition  solutions  and  supplies  must  include  the  lowest  charge  level 
methodology.  The  lowest  charge  level  is the  25th  percentile  of providers  charges. 
Other Payers Reimbursement Methodologies 
According  to  research  conducted  by  the  Office  of  Inspector  Generals  (OIG)  Office  of 
Audit  Services  (OAS),  some  other  payers  pay  significantly  less  for  parenteral  nutrition 
than  Medicare.  Some  of  these  payers  reimbursement  formulas  include  payments 
based  on  all-inclusive  per  diem  rates.  All-inclusive  or  global  rates  include  parenteral 
nutrition  solution,  supplies,  administration  kits,  infusion  pumps,  and  IV  poles. 
Related  Work by the Office of Inspector General 
In  1993,  the  OIGs  Office  of  Evaluation  and  Inspections  released  a report  titled, 
Inappropriate  Payments for  Total Pat-enter-alNutrition (OEI-12-92-00460).  The 
inspection  found:  (1)  Medicare  overpaid  $69  million  for  total  parenteral  nutrition  in 
1991,  43 percent  of  the  total  of  $162  million  allowed  for  this  service;  (2)  53 percent  of 
the  beneficiaries  had  end-stage  renal  disease  and  received  parenteral  nutrition  as  a 
2  supplement  three  times  a week,  at  high  cost  and  with  questionable  benefits;  (3)  review 
of  the  use  of  parenteral  nutrition  among  non  end-stage  renal  disease  beneficiaries 
revealed  inappropriate  patient  selection  and  over- and  under-feeding. 
MJZlTlODOLOGY 
We determined  Medicares  allowances  for  each  of  the  23 procedure  codes  which  cover 

parenteral  nutrition  solutions  and  supplies.  We  arrayed  these  codes  by  allowance  for 

1993,  1994,  and  1995.  We  determined  Medicares  1996  reimbursement  levels  based  on 

the  Medicares  maximum  reimbursement  for  the  four  parenteral  nutrition  solution 

codes  with  the  highest  allowances  in  1995. 

With  the  assistance  of  a pharmacist-consultant,  we  identified  the  components  which 

would  generally  be  included  in  solutions  reimbursed  under  each  of  the  four  codes. 

We  contacted  each  State  Medicaid  agency  to  determine  what  their  reimbursement 

formulas  were  and  their  maximum  reimbursement  for  the  solutions  representing  the 

four  codes.  We  also  determined  what  items  or  services,  if any,  were  included  in  their 

reimbursement  for  parenteral  nutrition  solutions. 

We  identified  the  20 Medicare  risk-contract  HMOs  with  the  highest  enrollments  as  of 

July  1996.  These  HMOs  covered  50 percent  of  all Medicare  beneficiaries  enrolled  in 

risk-contract  HMOs.  We  contacted  each  HMO  to  determine  what  their 

reimbursement  formulas  were  and  their  maximum  reimbursement  for  the  solutions 

representing  the  four  codes.  We  also  determined  what  other  items  or  services  were 

included  in  their  reimbursement  for  parenteral  nutrition  solutions. 

Supplier 
In  order  to  provide  an  illustration  of  provider  acquisition  costs  for  parenteral  nutrition 

solution,  we  obtained  one  suppliers  contracted  prices  for  parenteral  nutrition 

products.  We  compared  the  suppliers  cost  for  the  nutrition  products  with  Medicare 

reimbursement  rates.  These  contracted  prices  are  from  the  three  manufacturers  that 

dominate  the  parenteral  nutrition  market.  Manufacturers  provide  different  contracted 

prices  to  suppliers  based  on  the  volume  purchased.  Since  we  received  information 

from  a low-volume  supplier,  the  manufacturers  contracted  prices  represent  the  upper 

threshold  of  suppliers  contracted  acquisition  costs.  Large  volume  purchasers  would 

probably  receive  even  further  discounts  in  price  from  the  manufacturers. 

While  our  primary  emphasis  is on  how  Medicares  reimbursement  compares  to  that  of 

other  payers,  we  used  the  suppliers  contracted  prices  with  manufacturers  to  provide  a 

basic  comparison  of  how  acquisition  costs  for  parenteral  nutrition  products  compare  to 

Medicares  reimbursement. 

3 
 FINDINGS 

Medicare  Reimbursement  for the Four  Parenteral  Nutrition  Codes  is an 
Average  of 45  Percent  Higher  Than  Lower-Paying  Medicaid  Agencies. 
Thirty-two  of  the  49 Medicaid  agencies  that  responded  to  our  survey  provided  pricing 
information  on  one  or  more  of  the  four  selected  parenteral  nutrition  procedure  codes. 
Medicare  reimbursement  for  one  or  more  of  the  four  parenteral  nutrition  codes  is 
higher  than  that  of  the  majority  of  these  32 agencies  (see  Chart  A  on  the  next  page). 
In  1995,  if Medicare  reimbursement  for  each  of  these  four  codes  were  reduced  by  the 
average  amount  Medicare  reimburses  more  than  lower-paying  Medicaid  agencies,  total 
allowances  would  have  been  reduced  from  $145  million  to  $80  mil1ion.i 
Procedure  Code  B4189 
Medicare  reimbursement  for  B4189  ($162.39)  is higher  than  more  than  two-thirds  of 

the  State  Medicaid  agencies  that  provided  prices  for  this  code.  Medicares 

reimbursement  ranges  between  3 and  204  percent  higher  than  these  Medicaid 

agencies  reimbursement,  averaging  55 percent  higher.  In  1995,  if Medicare 

reimbursement  for  this  code  was  reduced  by  the  average  amount  Medicare  reimburses 

more  than  lower-paying  Medicaid  agencies,  Medicare  allowances  would  have  been 

reduced  from  $24  million  to  $10.8  million. 

Procedure  Code  B4193 
Medicares  reimbursement  for  B4193  ($209.84)  is higher  than  four-fifths  of  the  State 
Medicaid  agencies  that  provided  prices  for  this  code.  Medicares  reimbursement 
ranges  between  less  than  1 and  215  percent  higher  than  these  Medicaid  agencies 
reimbursement,  averaging  39 percent  higher.  In  1995,  if Medicare  reimbursement  for 
this  code  was  reduced  by  the  average  amount  Medicare  reimburses  more  than  lower-
paying  Medicaid  agencies,  Medicare  allowances  would  have  been  reduced  from  $39 
million  to  $23.8  million. 
Procedure  Code  B4197 
Medicares  reimbursement  for  B4197  ($248.00)  is higher  than  more  than  three-

quarters  of  the  State  Medicaid  agencies  that  provided  prices  for  this  code.  Medicares 

reimbursement  ranges  between  2 and  217  percent  higher  than  these  Medicaid 

agencies  reimbursement,  averaging  46 percent  higher.  In  1995,  if Medicare 

reimbursement  for  this  code  was  reduced  by  the  average  amount  Medicare  reimburses 

more  than  lower-paying  Medicaid  agencies,  Medicare  allowances  would  have  been 

reduced  from  $66  million  to  $35.7  million. 

4 
 Procedure  Code  B4199 
Medicares  reimbursement  for  B4199  ($276.00)  is higher  than  well  over  half  of  the 
State  Medicaid  agencies  that  provided  prices  for  this  code.  Medicares  reimbursement 
ranges  between  less  than  1 and  209  percent  higher,  averaging  39 percent  higher.  In 
1995,  if Medicare  reimbursement  for  this  code  was  reduced  by  the  average  amount 
Medicare  reimburses  more  than  lower-paying  Medicaid  agencies,  Medicare  allowances 
would  have  been  reduced  from  $16  million  to  $9.6  million. 
ChartA 
MEDICAID  AaENCIES  WHICH  REIMBURSE  LESS  -l-HAN  MEDICARE 
COMPARED  TO  -l-O-,-AL  A<3ENCIES  BY  HCPCS 
36  1 
Other Reimbursement  Formulas 
Medicaid  agencies  which  reimburse  less  than  Medicare  for  parenteral  nutrition  use  a 
variety  of  reimbursement  formulas.  These  include,  but  are  not  limited  to, 
reimbursement  based  on:  (1)  the  average  wholesale  price  (AWP),  (2)  estimated  costs, 
(3)  fee  schedules,  (4)  global  rates,  and  (5)  previous  Medicare  rates.  Reimbursement 
may  also  include  dispensing  fees,  compounding  fees,  and  payments  for  additives  to  the 
parenteral  nutrition  solution.  Many  of  the  Medicaid  agencies  that  reimburse  less  than 
Medicares  current  reimbursement  rate  use  a global  rate  or  base  their  reimbursement 
on  Medicare  rates  from  previous  years.  Many  of  those  agencies  which  could  not  give 
us  pricing  information  reimburse  based  on  average  wholesale  prices  or  estimated  costs 
which  vary  by  product.  Other  agencies  apply  several  formulas  to  calculate  their 
reimbursement,  then  reimburse  whichever  is lowest. 
J  Other Items Included  in Parenteral Nutrition Reimbmement 
While  Medicare  reimburses  separately  for  each  parenteral  nutrition  supply,  it does  not 
provide  separate  reimbursement  for  services  related  to  parenteral  nutrition.  In 
contrast,  some  Medicaid  agencies  include  both  supplies  and  services  in  their 
reimbursement  formula.  Of  the  eight  agencies  that  reported  including  all  other  items 
in  their  reimbursement,  six reimburse  less  than  Medicare  reimburses  for  the  solution 
alone  for  at  least  one  of  the  four  parenteral  nutrition  codes.  Supplies  include  lipids, 
administration  kits,  supply  kits,  infusion  pumps,  and  IV  poles.  Some  of  these  agencies 
also  include  added  medications,  education,  labor,  and  lab  work  in  their 
reimbursement.  For  example,  one  agency,  which  reimburses  based  on  a global  rate, 
reimburses  $76  per  liter  of  parenteral  nutrition  solution  including  labor  and  delivery, 
the  pump,  supplies  and  added  ingredients  such  as lipids.  Medicare,  on  the  other  hand, 
reimburses  between  $162  and  $276  depending  on  the  grams  of  protein  in  the  solution 
and  reimburses  an  additional  amount  for  the  pump  and  other  supplies.  At  least  five 
other  Medicaid  agencies  include  some  supplies  or  services  in  their  reimbursement  for 
parenteral  nutrition  solutions. 
Medicare  Reimbursement  for the Four  Parenteral  Nutrition  Codes  is an 
Average  of 78 Percent  Higher  Than  Lower-Paying  Medicare  Risk-
Contract  HMOs. 
Ten  of  the  17 Medicare  risk-contract  HMOs  that  responded  to  our  survey  were  able 

to  provide  pricing  information  on  one  or  more  of  the  four  selected  parenteral  nutrition 

codes.  Medicare  reimburses  more  than  all  10 HMOs  for  one  or  more  of  the  four 

codes  examined  (see  Chart  B on  the  next  page).  In  1995,  if Medicare  reimbursement 

for  each  of  these  four  codes  were  reduced  by  the  average  amount  Medicare 

reimburses  more  than  lower-paying  Medicare  risk-contract  HMOs,  total  allowances 

would  have  been  reduced  from  $145  million  to  $31  million. 

Procedure  Code  B4189 
Medicare  reimbursement  for  B4189  ($162.39)  is higher  than  two-thirds  of  the  HMOs 
that  provided  prices  for  this  code.  Medicares  reimbursement  ranges  between  2 and 
195 percent  higher  than  these  Medicare  HMOs  reimbursement,  averaging  74 percent 
higher.  In  1995,  if Medicare  reimbursement  for  this  code  was  reduced  by  the  average 
amount  Medicare  reimburses  more  than  lower-paying  HMOs,  Medicare  allowances 
would  have  been  reduced  from  $24  million  to  $6.3  million. 
Procedure  Code  B4193 
Medicare  reimbursement  for  B4193  ($209.84)  is higher  than  nearly  three-quarters  of 
the  HMOs  that  provided  prices  for  that  code.  Medicares  reimbursement  ranges 
between  2 and  282  percent  higher  than  these  Medicare  HMOs  reimbursement, 
averaging  87 percent  higher.  In  1995,  if Medicare  reimbursement  for  this  code  was 
6 
 reduced  by  the  average  amount  Medicare  reimburses  more  than  lower-paying  HMOs, 
Medicare  allowances  would  have  been  reduced  from  $39  million  to  $5.1  million. 
Procedure  Code  B4197 
Medicare  reimbursement  for  B4197  ($248.00)  is higher  than  nearly  all  of  the  HMOs 
that  provided  prices  for  that  code.  Medicares  reimbursement  ranges  between  1 and 
351  percent  higher  than  these  Medicare  HMOs  reimbursement,  averaging  77 percent 
higher.  In  1995,  if Medicare  reimbursement  for  this  code  was  reduced  by  the  average 
amount  Medicare  reimburses  more  than  lower-paying  HMOs,  Medicare  allowances 
would  have  been  reduced  from  $66  million  to  $15.2  million. 
Procedure  Code  B4199 
Medicare  reimbursement  for  B4199  ($276.00)  is higher  than  all  the  HMOs  that 
provided  prices  for  that  code.  Medicares  reimbursement  ranges  between  6 and  325 
percent  higher  than  these  Medicare  HMOs  reimbursement,  averaging  72 percent 
higher.  In  1995,  if Medicare  reimbursement  for  this  code  was  reduced  by  the  average 
amount  Medicare  reimburses  more  than  lower-paying  HMOs,  Medicare  allowances 
would  have  been  reduced  from  $16  million  to  $4.4  million. 
Chart  B 
MEDICARE  RISK-CONTRACT  HMO8  WHICH  REIMBURSE  LESS  THAN  MEDICARE 
COMPARED  -l-O  l-O-l-AL  HMO=  BY  HCPCS 
(I 1 
7 
 Other Reimbursement  Form&s 
Medicare  HMOs  which  reimburse  less  than  Medicare  use  a variety  of  reimbursement 
methods  including  reimbursement  based  on  AWP,  fee  schedules,  and  global  rates. 
However,  no  particular  reimbursement  formula  used  by  Medicare  HMOs  is 
consistently  lower  than  Medicares  rates. 
Other Items Included  in Parenteral Nutrition Reimbursement 
At  least  nine  Medicare  HMOs  include  items  other  than  the  solution  in  their 
reimbursement  for  parenteral  nutrition.  All  nine  include  administration  kits,  supply 
kits,  pumps,  and  IV  poles.  Six HMOs  include  lipids  and  at  least  five  include  the 
services  of  a health  care  professional.  Seven  of  the  nine  HMOs  that  include  some 
supplies  in  their  reimbursement,  reimburse  less  than  Medicare  does  for  the  parenteral 
nutrition  solution  alone. 
Few  of  the  Medicare  HMOs  that  gave  us  pricing  information  reimburse  more  than 
Medicare  for  any  of  the  four  parenteral  nutrition  codes.  Of  those  that  do, 
reimbursement  is not  significantly  higher  than  Medicares.  Four  Medicare  HMOs 
reimburse  more  than  Medicare  for  B4189  by  an  average  of  18 percent.  Two  Medicare 
HMOs  reimburse  more  than  Medicare  for  B4193  by  an  average  of  9 percent.  One 
Medicare  HMO  reimburses  5 percent  more  than  Medicare  for  B4197.  No  Medicare 
HMOs  reimburse  more  than  Medicare  for  B4199. 
Medicare  Reimbursement  for the Four  Parenteral  Nutrition  Codes  is an 
Average  of 11 Times Higher  Than  Some Manufacturers  Contract  Prices. 
Medicare  reimbursement  for  the  four  selected  codes  is between  9 and  12 times  higher 
than  the  contracted  price  charged  by three  manufacturers  to  a low-volume  supplier  of 
parenteral  nutrition.3  It  is our  assumption  that  manufacturer  charges  to  higher-
volume  suppliers  would  be  even  lower. 
Manufacturers  contract  prices  for  each  of  the  parenteral  nutrition  solution  codes 
examined  ranged  between  $13  and  $29  for  one  supplier.  Medicare  allows  between 
$162  and  $276  for  each  of  the  four  codes.  While  both  the  manufacturers  prices  and 
Medicare  rates  presented  here  represent  only  the  cost  of  the  parenteral  nutrition 
solution,  it is clear  that  Medicare  rates  for  the  solution  are  significantly  higher  than  the 
discounted  costs  of  one  low-volume  supplier. 
8 
 RECOMMENDATION 
The  HCFA  Should Examine  Other  Payment  Methods  That  Could Lead 
To  More  Cost  Effective  Reimbursement  For  Parenteral  Nutrition 
solutions. 
It  is clear  that  many  other  payers  reimburse  less  than  Medicare  for  parenteral 

nutrition.  In  addition,  suppliers  may  purchase  parenteral  nutrition  solutions  at 

discounted  prices  which  are  significantly  lower  than  Medicares  reimbursement  rates. 

Implementing  an  alternative  reimbursement  method  could  result  in  significant  savings 

to  the  Medicare  program.  We  urge  HCFA  to  pursue  one  or  more  of  the  following 

options  to  bring  Medicares  reimbursement  in  line  with  Medicaid  and  other  payers. 

Inherent  Reasonableness 

The  Secretary  or  the  DMERCs  could  use  their  inherent  reasonableness  authority  to 

reduce  reimbursement  to  more  appropriate  levels. 

Acquisition  Cost 

The  HCFA  could  base  its  reimbursement  on  suppliers  acquisition  costs.  There  is 

evidence  that  acquisition  costs  for  parenteral  nutrition  are  far  below  Medicares 

current  reimbursement  rate. 

Competitive  Bidding 

The  HCFA  could  seek  legislative  authority  to  use  competitive  bidding  to  take 

advantage  of  its  position  as  a high-volume  purchaser  of  parenteral  nutrition. 

AGENCY  COMMENTS 
The  HCFA  concurred  with  our  recommendation.  The  HCFA  reported  that  they  have 
convened  a Workgroup  to  focus  on  ways  to  reduce  and  control  costs  for  parenteral 
nutrition.  The  HCFA  also  explained  that  the  Presidents  Fiscal  Year  1998  budget 
includes  proposals  to  give  carriers  the  authority  to  make  inherent  reasonableness 
adjustments  for  durable  medical  equipment,  to  eliminate  the  mark  up  for  drugs  and 
biologicals  and  include  acquisition  cost  in  the  reimbursement  calculation,  and  to 
authorize  the  Secretary  to  set  payment  rates  for  Part  B services  bases  on  competitive 
bidding.  The  full  text  of  HCFAs  comments  is included  in Appendix  B. 
9 
 ENDNOTES 

1.  The  average  which  Medicare  reimburses  more  than  Medicaid  was  calculated  in  the 
following  manner: 
For  each  code  the  percentage  difference  between  each  lower-paying  Medicaid 
agencys  price  and  Medicares  reimbursement  level  was  calculated.  These 
percentage  differences  were  then  averaged  for  each  code.  Using  the  average 
for  each  code  we  calculated  the  overall  percentage  difference  in  prices  for 
parenteral  nutrition.  Potential  Medicare  reductions  in  allowances  were 
calculated  by  subtracting  the  overall  percentage  difference  from  Medicares 
actual  1995  allowances. 
The  average  differences  for  Medicare  risk-contract  HMOs  and  manufacturers 
contract  prices  were  calculated  in  the  same  manner. 
2.  See  explanation  of  calculations  above. 
3.  See  explanation  of  calculations  above. 
10 
 APPENDIX  A 

Definition  of  four  parenteral  nutrition  procedure  codes  with  the  highest  allowances  in 
1995. 
B4189  Parenteral  nutrition  solution;  compounded  amino  acid  and 
carbohydrates  with  electrolytes,  trace  elements,  and  vitamins 
including  preparation,  any  strength,  10 to  51 grams  of  protein  -
premix. 
B4193  Parenteral  nutrition  solution;  compounded  amino  acid  and 
carbohydrates  with  electrolytes,  trace  elements,  and  vitamins 
including  preparation,  any  strength,  52 to  73 grams  of  protein  -
premix. 
B4197  Parenteral  nutrition  solution;  compounded  amino  acid  and 
carbohydrates  with  electrolytes,  trace  elements,  and  vitamins 
including  preparation,  any  strength,  74 to  100 grams  of  protein  -
premix. 
B4199  Parenteral  nutrition  solution;  compounded  amino  acid  and 
carbohydrates  with  electrolytes,  trace  elements,  and  vitamins 
including  preparation,  any  strength,  over  100 grams  of  protein  -
premix. 
A-l  APPENDIX  B 

AGENCY COMMENTS 

B-l  Health  Care 

Financmg  Adnmstrat~on 

Memorandum 
JUN  1997 
2  7 
DATE 
TO  June Gibbs Brown 
Inspector General 
.C 
FROM  Bruce C. VIadeck. 
Administrator 
SUBJECT  Office of  Inspector General (OIG) Draft Report: Medicare 
Reimbursement  for Parenteral Nutrition, (OEI-03-96-00230) 
We reviewed the above-referenced  report concerning Medicares reimbursement  of 
parenteral nutrition as compared to other payers. 
Our comments are attached for your consideration.  Thank you for the opportunity  to 
review and comment on this report. 
Attachment 
  Health Care Financing Administration  (HCFA) Comments on 

Offke  of Insnector General (OIG) Draft Report entitled: Medicare  Reimbursement  for 

Parenteral Nutrition. (OEI-03-96-00230) 

OIG Rmommendation 

HCFA should examine other payment methods that could lead to more cost-effective 

reimbursement  for parenteral  nutrition solutions.  We urge HCFA to pursue one or more 

of the following options to bring Medicares reimbursement  in line with Medicaid and 

other payers. 

Inherent Reasonableness 

The Secretary  or the durable medical equipment regional carriers (DMERCs) could use 

their inherent reasonableness  authority to reduce reimbursement  to more appropriate 

levels. 

HCFA Response 

We concur.  HCFA convened a Workgroup to focus on ways to reduce and control costs 

for parenteral  nutrition.  In fact, the Workgroup is currently  considering use of the 

inherent reasonableness  process as one method for reducing cost for the enteral nutrition 

therapy benefit.  The results of our review of this process will enable HCFA to use 

lessons learned to avoid problem experiences with the enteral nutrition inherent 

reasonableness  calculation.  In addition, the Presidents  fiscal year (FY) 1998 budget 

includes a proposal that would restore to Medicare carriers the authority  to make inherent 

reasonableness  adjustments  for DME, prosthetics (DMEPOS),  and surgical dressings.  * 

The Secretarys  inherent reasonableness  authority would apply to all Part B services 

except physician  services. 

Acquisition  Cost 

HCFA could base its reimbursement  on suppliers acquisition  costs.  There is evidence 

that acquisition  costs for parenteral nutrition is far below Medicares current 

reimbursement  rate. 

  Page 2 
HCFA Response 
We concur.  A proposal that would eliminate the mark-up for drugs and biologicals,  such 
as parenteral nutrition,  is included in the Presidents FY 1998 budget.  Under this 
provision, the Medicare amount payable for the drug or biological would be the lowest 
Of: 
(a)  the physicians,  suppliers, or other persons actual acquisition cost, 

(b)  the average wholesale price, as specified by the Secretary, 

(c)  the median actual acquisition cost of all claims for the .drug or biological for the 

12-month period beginning July  1, 1998, adjusted annually  and effective on 
January  1 of each year, or 
(d)  the amount determined  otherwise under the Social Security Act. 
HCFA could seek legislative authority to use competitive bidding to take advantage  of its 
position as a high volume purchaser of parenteral nutrition. 
HCFA Resnonse 
We concur.  Under a proposal included in the Presidents FY 1998 budget, the Secretary 
would be authorized  to set payment rates for Part B services (excluding physician 
services) based on competitive bidding.  The items included in a bidding process and the 
geographic areas selected for bidding would be determined by the Secretary based on 
availability  of entities able to furnish the item or services and the potential for achieving 
savings.  Bids would be accepted from entities only if they met quality standards 
specified by the Secretary.  The Secretary would have the authority  to exclude suppliers 
whose bids are above the cut-off bid determined sufficient to maintain access.  Automatic 
reductions in rates would be triggered for clinical laboratory  services and DMEPOS, 
excluding oxygen services, if by 200 1 a 20 percent reduction  had not been achieved.