Department of Health and Human Services 
OFFICE OF 
INSPECTOR GENERAL 
Medicare Reimbursement of 
End Stage Renal Disease Drugs 
JUNE GIBBS BROWN 
Inspector General 
JUNE 2000 
OEI-03-00-00020  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. 
OEI's Philadelphia Regional Office prepared this report under the direction of Robert A. Vito, 
Regional Inspector General, and Linda M. Ragone, Deputy Regional Inspector General.  Principal 
OEI staff included: 
REGION  HEADQUARTERS 
David Tawes, Project Leader	 Stuart Wright, Program Specialist 
Scott Horning, Technical Support Staff 
Linda Moscoe, Technical Support Staff 
Brian Ritchie, Technical Support Staff 
To obtain copies of this report, please call the Philadelphia Regional Office at (800) 531-9562. 
Reports are also available on the World Wide Web at our home page address: 
http://www.dhhs.gov/progorg/oei  E X E C U T I V E   S U M M A R Y  
PURPOSE 
This inspection compares Medicare payment amounts for end stage renal disease drugs 
(ESRD) with amounts paid by Medicaid and the Department of Veterans Affairs. 
BACKGROUND 
Generally, Medicare does not pay for most over-the-counter or outpatient prescription 
drugs.  However, Medicare Part B does cover certain drugs furnished by independent 
dialysis facilities.  These drugs must be medically necessary and be included in the list of 
separately billable drugs found in the Renal Dialysis Facility Manual, Section 318.1. 
Medicares total charges for ESRD drugs provided by independent dialysis facilities 
exceeded $1.4 billion in 1998. 
Prescription drugs furnished by independent dialysis facilities are reimbursed by Medicare 
fiscal intermediaries from the Medicare Part B fund.  In general, a covered drug is 
reimbursed at 95 percent of the drugs average wholesale price (AWP).  Medicare 
beneficiaries are responsible for a 20 percent copayment.  State Medicaid agencies have 
the authority to develop their own reimbursement methodology for outpatient prescription 
drugs under the pharmacy benefit.  Like Medicare, most Medicaid agencies use AWP as 
the basis for calculating their drug reimbursement amounts.  Additionally, drug 
manufacturers are required by law to enter into rebate agreements with Medicaid in order 
to participate in the program.  Unlike Medicare and Medicaid, the Department of Veterans 
Affairs (VA) purchases drugs for its healthcare system directly from manufacturers or 
wholesalers.  There are several purchase options available to the VA, including the Federal 
Supply Schedule, Blanket Purchase Agreements, and VA national contracts. 
We focused our inspection on just five drug codes, which accounted for $379 million in 
total charges to Medicare in 1998.  We compared Medicares fourth quarter 1999 
reimbursement amounts for these drugs to Medicaid amounts and VA acquisition costs. 
FINDINGS 
Medicare allowed amounts would be nearly halved for five ESRD drugs if 
amounts were based on VA acquisition costs 
Medicare allowed amounts during the fourth quarter of 1999 were greater that the VA 
acquisition costs for the five drugs reviewed.  For two drugs, Medicare allowed amounts 
1 
Medicare Reimbursement of ESRD Drugs  OEI-03-00-00020  were more than double the VAs contracted price.  Medicare would save between 37 and 
56 percent for each of the five drugs if its allowed amounts were equal to VA acquisition 
costs. 
Medicare would save between 5 and 38 percent for five ESRD drugs if its allowed 
amounts were equal to Medicaid reimbursement including rebates 
Medicare allowed amounts were greater than Medicaid amounts for each of the five 
reviewed drugs during the fourth quarter of 1999.  Medicaid amounts include any rebates 
calculated for the drugs.  Medicare allowed amounts exceeded Medicaid amounts by a 
only a small percentage for two of the drugs since Medicaid agencies did not receive 
rebates for these specific products.  For two drugs, the Medicaid amount was 
approximately one-third less than the Medicare allowed amount. 
While we were able to determine percentage differences between the Medicare allowed amounts 
and other agencies costs for the reviewed drugs, we could not prepare a precise estimate of 
dollar savings.  The only reimbursement information available to us represented the total amount 
billed to Medicare for ESRD drugs and not the total amount which was paid.  However, if the 
percentage savings that we calculated for each drug were applied to Medicares total charges (i.e., 
the amount billed), then Medicare could have saved up to $42 million in 1998 if their allowed 
amounts equaled Medicaid amounts.  Medicare could have saved up to $162 million in 1998 if 
their allowed amounts equaled VA acquisition costs.  Because total charges are often inflated, we 
recognize that the estimates provided are the most that Medicare could have possibly saved. 
However, even if the savings did not reach these maximum levels, the potential savings would still 
be substantial. 
RECOMMENDATION 
The Department of Veterans Affairs (VA) purchases drugs for its healthcare system 
directly from manufacturers or wholesalers.  Conversely, Medicare and Medicaid 
reimburse doctors and suppliers for drugs which they administer or supply to beneficiaries. 
We recognize that the Health Care Financing Administration (HCFA), Medicaid, and the 
VA operate under different statutory constraints.  Nevertheless, the fact remains that other 
government entities can get certain prescription drugs at drastically lower prices than 
Medicare. 
Our current findings provide further support for recommendations made in earlier reports. 
We previously recommended, and HCFA concurred, that HCFA re-examine its Medicare 
drug reimbursement methodologies with the goal of reducing payments as appropriate. 
We outlined a number of options for implementing this recommendation, including: (1) 
greater discounting of published average wholesale prices, (2) basing payment on 
acquisition costs, (3) establishing manufacturers rebates similar to those used in the 
Medicaid program, and (4) using competitive bidding. 
2 
Medicare Reimbursement of ESRD Drugs  OEI-03-00-00020  We continue to support the need for lower drug prices for the Medicare program and its 
beneficiaries.  We realize, however, that HCFAs power to lower drug prices through the 
use of its inherent reasonableness authority was recently limited by a provision of the 
Medicare, Medicaid and SCHIP Balanced Budget Refinement Act of 1999.  Therefore, we 
recommend that HCFA press for legislative efforts which would (1) immediately lower the 
price of these five ESRD drugs, (2) use the Federal Supply Schedule (FSS) as a basis for 
developing Medicare allowed amounts, or (3) reform the current drug pricing 
methodology in another manner which would substantially lower unreasonable 
prescription drug prices. 
Agency Comments 
The HCFA concurred with our recommendation, noting that basing reimbursement on 
acquisition cost is probably the best way to ensure that Medicare pays fair prices for 
covered drugs.  Additionally, HCFA gave a detailed account of their numerous attempts 
to lower unreasonable drug reimbursement amounts in the Medicare program.  Currently, 
HCFA plans to utilize a number of more accurate drug prices developed by First 
Databank, publisher of a pricing compendium used by the pharmaceutical industry.  HCFA 
requested that Medicare contractors use these prices when calculating their drug 
reimbursement amounts.  The HCFA also commented that they are working to develop a 
comprehensive electronic file on the pricing of Medicare covered drugs, and are 
continuing a competitive bidding demonstration project for albuterol in Texas.  In 
addition, HCFA is consulting with the Department of Justice and the Office of Inspector 
General on the feasibility of developing additional means to ensure that accurate drug 
pricing data is used in setting Medicare reimbursement rates.  The full text of HCFAs 
comments is presented in Appendix D. 
We commend HCFAs efforts to lower Medicare drug reimbursement rates.  We fully 
support attempts to obtain more accurate prices for the Medicare program.  We believe 
that HCFAs request that Medicare contractors use the more accurate prices supplied by 
First Databank is a significant first step towards reimbursing drugs in a more appropriate 
manner. 
3 
Medicare Reimbursement of ESRD Drugs  OEI-03-00-00020  T A B L E   O F   C O N T E N T S  
PAGE

EXECUTIVE SUMMARY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1

INTRODUCTION  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5

FINDINGS

Medicare payments compared to VA  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10

Medicare payments compared to Medicaid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10

RECOMMENDATION  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  12

APPENDICES

A.  Previous OIG Reports on Medicare Drug Reimbursement  . . . . . . . . . . . . . . . . . . . 14

B.  Description of HCPCS Codes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16

C.  State Medicaid Outpatient Drug Pricing Methodologies  . . . . . . . . . . . . . . . . . . . . .  17

D.  Health Care Financing Administration Comments . . . . . . . . . . . . . . . . . . . . . . . . . . 19

4 
Medicare Reimbursement of ESRD Drugs  OEI-03-00-00020  I N T R O D U C T I O N  
PURPOSE 
This inspection compares Medicare payment amounts for end stage renal disease (ESRD) 
drugs with amounts paid by Medicaid and the Department of Veterans Affairs. 
BACKGROUND 
Medicare Coverage of ESRD Drugs 
Generally, Medicare does not pay for most over-the-counter or outpatient prescription 
drugs.  However, under specific circumstances, Medicare Part B will cover drugs used in 
association with organ transplantations, chemotherapy, durable medical equipment, 
infusion devices, and vaccinations.  Additionally, Medicare Part B covers certain drugs 
furnished by independent dialysis facilities that are not included in the ESRD composite 
rate payment.  These drugs must be medically necessary and be included in the list of 
separately billable drugs found in the Renal Dialysis Facility Manual, Section 318.1. 
The ESRD facility composite rate payment includes almost all per treatment costs for an 
ESRD patient and is paid by fiscal intermediaries from the Part A fund.  Separately billable 
ESRD drugs furnished by independent dialysis facilities are reimbursed by fiscal 
intermediaries from the Part B fund. 
Medicares total charges for ESRD drugs provided by independent dialysis facilities 
exceeded $1.4 billion in 1998.  This figure represents the amount which was billed to 
Medicare. 
Medicare Drug Reimbursement 
The Health Care Financing Administration (HCFA), which administers the Medicare 
program, has required Medicare Part B carriers to calculate payment allowances for 
covered drugs.  To ensure uniform pricing, Part B carriers are then required to furnish the 
allowed amounts for the drugs to the Part A intermediaries operating in their jurisdiction. 
Medicares current reimbursement methodology for prescription drugs is defined by 
Section 4556 of the Balanced Budget Act of 1997.  Carriers base their payment amount 
for a drug on its average wholesale price (AWP) as published in Drug Topics Red Book or 
similar pricing publications used by the pharmaceutical industry.  If a drug is available only 
in brand form, reimbursement is calculated by taking 95 percent of the drugs AWP.  If a 
drug has both brand and generic sources available, reimbursement is based on 95 percent 
of the median AWP for generic sources.  However, if a brand name products 
5 
Medicare Reimbursement of ESRD Drugs  OEI-03-00-00020  AWP is lower than the median generic price, Medicare reimburses 95 percent of the

lowest brand price.  Medicare beneficiaries are responsible for a 20 percent copayment for

covered drugs.

Section 4316 of the Balanced Budget Act of 1997 allows HCFA to diverge from the

statutorily defined payment method if the method results in payment amounts which are

not inherently reasonable.  However, HCFAs ability to use its inherent reasonableness

authority was recently limited by a provision of the Medicare, Medicaid and SCHIP

Balanced Budget Refinement Act of 1999.  In short, this provision requires that before

HCFA can invoke this authority, a study must be performed by the Comptroller General to

determine the potential effects of utilizing inherent reasonableness measures. 

Furthermore, the criteria used in identifying excessive payments must be re-evaluated, and

its validity and reliability ensured. 

Medicaid Drug Reimbursement 
Each State Medicaid agency has the authority to develop its own reimbursement 
methodology, subject to upper limits set by HCFA.  Like Medicare, most Medicaid 
agencies use AWP as the basis for calculating their reimbursement amounts for outpatient 
drugs.  However, Medicaid agencies generally use a more deeply discounted AWP than 
does Medicare. 
Additionally, drug manufacturers are required by Federal law to enter into rebate 
agreements with Medicaid in order to be eligible for Medicaid reimbursement of their 
products.  While most drugs are subject to these requirements, certain products, such as 
vaccines, which meet specific statutory guidelines are exempt from rebates. 
In 1999, the quarterly rebate for brand-name drugs was based on either 15.1 percent of 
the average manufacturer price (AMP) or the difference between the AMP and the best 
price, whichever was greater.  The AMP is the average price paid by wholesalers for 
products distributed for retail trade.  Best price is the lowest price paid by any purchaser 
with the exception of Federal agencies and State pharmaceutical assistance programs.  The 
rebate amount for generic drugs was 11 percent of AMP. 
Department of Veterans Affairs Drug Reimbursement 
Unlike Medicare and Medicaid, the Department of Veterans Affairs (VA) purchases drugs 
for its healthcare system directly from manufacturers or wholesalers.  There are several 
purchase options available to the VA, including the Federal Supply Schedule, Blanket 
Purchase Agreements, and VA national contracts. 
The Federal Supply Schedule provides agencies like the VA with a simple process for 
purchasing commonly used products in various quantities while still obtaining the 
discounts associated with volume buying.  Using competitive procedures, contracts are 
awarded to companies to provide services and supplies over a given period of time. 
Although the General Services Administration awards most Federal Supply Schedule 
6 
Medicare Reimbursement of ESRD Drugs  OEI-03-00-00020  contracts, the VA awards contracts for certain medical items.  Agencies are not required 
to use the Federal Supply Schedule, however, and are sometimes able to negotiate prices 
lower than the Federal Supply Schedule price. 
Related Work by the Office of Inspector General 
The Office of Inspector General (OIG) has previously studied a number of issues related 
to Medicare prescription drug reimbursement.  Brief summaries of selected studies are 
presented in Appendix A. 
METHODOLOGY 
Medicare Charges for Prescription Drugs 
To determine total Medicare charges for ESRD drugs, we compiled a list of revenue 
center codes representing drugs covered by Medicare in 1998.  Revenue center codes are 
codes which facilities use to define the product or service provided.  We selected 1998 
because it was the most recent year with complete data in HCFAs National Claims 
History file.  We then determined the Medicare total charges and services billed by 
independent dialysis facilities for each of these revenue center codes.  We aggregated the 
charges for the individual revenue center codes in order to determine total Medicare 
charges for ESRD drugs provided by independent dialysis facilities in 1998. 
Medicare Part Bs total charges for ESRD drugs furnished by independent dialysis 
facilities totaled more than $1.4 billion in 1998.  Approximately $1 billion of the total 
charges were for epoetin alfa (revenue center codes 0634 and 0635).  We decided to 
exclude epoetin alfa from our review because its pricing had been previously reviewed by 
our Office of Audit Services.  Nearly all of remaining charges were made using revenue 
center code 0636, defined as drugs requiring specific identification--detailed coding. 
Drugs billed using this revenue center code are specifically identified using the HCFA 
Common Procedure Coding System (HCPCS).  A HCPCS code defines the type of drug 
billed, and in most cases, a dosage amount.  Using the National Claims History file, we 
determined that in 1998, five HCPCS codes accounted for $379 million (90 percent) of 
the $424 million in total charges for revenue center code 0636.  A list of the reviewed 
HCPCS codes along with their definitions is presented in Appendix B. 
Medicare Pricing for ESRD Drugs 
Because Medicare does not have uniform national allowed amounts for prescription drugs, 
we collected payment information from individual contractors.  We obtained Medicare 
drug payment amounts for the five contractors with the highest charges for ESRD drugs in 
1998: Trailblazer Health Enterprises of Texas, Blue Cross and Blue Shield of Georgia, 
Blue Cross of California, Blue Cross and Blue Shield of Florida, and Empire Blue Cross 
7 
Medicare Reimbursement of ESRD Drugs  OEI-03-00-00020  and Blue Shield of New York.  To determine a single Medicare allowed amount, we 
calculated median prices for each HCPCS code based on the information provided. 
Matching HCPCS Codes to National Drug Codes 
Unlike Medicare, Medicaid and the VA use national drug codes (NDCs) rather than 
HCPCS codes to identify drugs products.  Each drug manufactured or distributed in the 
United States has a unique NDC.  The NDCs identify the manufacturer of the drug, the 
product dosage form, and the package size.  From the NDCs, the drugs can be identified 
as either brand or generic. 
Because of these coding differences, we used Drug Topics Red Book to identify the 
specific NDCs that would match the HCPCS code definition for each of the five drugs in 
our review.  For each drug, we selected the NDCs which met the exact dosage and 
administration method delineated in the HCPCS code description.  When this was not 
possible, we chose NDCs with dosage amounts for which a conversion factor to the 
HCPCS definition could be readily determined.  Four of the five HCPCS codes had only 
one NDC which met our matching criteria.  One HCPCS code had three matching NDCs. 
Medicaid Pricing of ESRD Drugs 
For our comparison, we used Medicaid reimbursement for prescription drugs under each 
states pharmacy benefit.  We gathered this information from the publication 
Pharmaceutical Benefits under State Medical Assistance Programs, December 1998 to 
determine each Medicaid agencys reimbursement methodology for outpatient prescription 
drugs.  Forty-five of the 51 agencies utilized pricing methodologies that were based on 
AWP.  The remaining six agencies priced their drugs using more complicated methods and 
were eliminated from our review.  We arrayed the remaining 45 Medicaid agencies by the 
amount that their pricing methodology discounted AWP.  We then calculated the mean 
(9.87 percent), median (10 percent), and modal (10 percent) AWP discounts.  A complete 
list of each Medicaid agencys pricing methodology is presented in Appendix C. 
We used Drug Topics Red Book October 1999 Update to determine the fourth quarter 
1999 AWP of the selected codes.  We then determined base Medicaid prices for the five 
drugs by reducing the AWP by the median discount of 10 percent, recognizing that some 
States may pay slightly more and others slightly less.  If the NDC dosage of the drug did 
not exactly match the HCPCS dosage, we multiplied the base Medicaid price by a 
conversion factor so that the Medicaid and Medicare prices would be for equal amounts of 
the drug. 
We accessed the Medicaid Drug Rebate Initiative system to ascertain the Medicaid rebate 
amounts for each of the drugs.  We used the most recent rebate amounts available for each 
NDC code, which in most cases was the third quarter of 1999.  For the one drug which 
had multiple NDC matches, we chose the most conservative rebate amount.  Additionally, 
Medicaid did not receive rebates for two of the drugs.  For three NDCs, the 
8 
Medicare Reimbursement of ESRD Drugs  OEI-03-00-00020  listed rebate was a for a dosage amount which was not equal to the HCPCS dosage 
amount.  In these cases, a conversion factor was used to calculate a rebate amount for the 
HCPCS dosage.  For each drug, we calculated a new Medicaid price by subtracting any 
rebate amounts from the base Medicaid price. 
VA Pricing of ESRD Drugs 
To determine the VAs fourth quarter 1999 acquisition costs for the drugs in our review, 
we obtained a file from the VA containing their contracted acquisition costs.  We looked 
up the corresponding contract price for each of the drugs by NDC code.  For the drug 
which had multiple NDC matches, we took the highest VA price for the drug.  We used 
the Federal Supply Schedule price for comparison purposes. 
If the NDC dosage of the drug did not exactly match the HCPCS dosage, we multiplied 
the contracted price by a conversion factor so that the VA and Medicare prices would be 
for equal amounts of the drug. 
Calculating Potential Medicare Savings 
To calculate potential Medicare savings, we compared the Medicare, Medicaid, and VA 
prices.  For each drug, we determined the percentage difference between the Medicare 
payment amount and the other agencies payment amounts.  This percentage indicated 
how much Medicare could have saved on each of the drugs if their payment amounts 
equaled amounts paid by Medicaid and the VA. 
9 
Medicare Reimbursement of ESRD Drugs  OEI-03-00-00020  F I N D I N G S  
Medicare allowed amounts would be nearly halved for five 
ESRD drugs if amounts were based on VA acquisition costs 
Medicare allowed amounts during the fourth quarter of 1999 were greater than VA 
acquisition costs for the five drugs reviewed.  For two drugs, levocarnitine and the 
hepatitis B vaccine, Medicare allowed amounts were more than double the VAs 
contracted price.  Medicare would save between 37 and 56 percent for each of the five 
drugs if its allowed amounts were equal to VA acquisition costs.  Table 1 provides the 
reviewed drugs, their comparative costs to Medicare and the VA, and potential Medicare 
savings. 
Table 1: Medicare and VA Drug Payment Amounts 
Medicare  VA  Potential 
HCPCS  Generic  Allowed  Acquisition  Medicare 
Code  Drug Name  Amount  Cost  Savings 
J0635  Calcitriol  $12.83  $8.10  36.9% 
J1760  Iron Dextran  $35.82  $19.41  45.8% 
J1955  Levocarnitine  $34.20  $15.08  55.9% 
J3364  Urokinase  $56.61  $31.70  44.0% 
90747  Hepatitis B Vaccine  $172.23  $84.36  51.0% 
Medicare would save between 5 and 38 percent for five 
ESRD drugs if its allowed amounts were equal to Medicaid 
reimbursement including rebates 
Medicare allowed amounts were greater than Medicaid amounts for each of the five 
reviewed drugs during the fourth quarter of 1999.  Medicaid amounts include any rebates 
that were calculated for the drugs.  Medicare allowed amounts exceeded Medicaid 
amounts by a only a small percentage for two of the drugs, calcitriol and the hepatitis B 
10 
Medicare Reimbursement of ESRD Drugs  OEI-03-00-00020  vaccine, because Medicaid agencies did not receive rebates for these specific products. 
For two drugs, levocarnitine and urokinase, the Medicaid amount was approximately one-
third less than the Medicare allowed amount.  Table 2 provides the reviewed drugs, their 
comparative costs to Medicare and Medicaid, and potential Medicare savings. 
Table 2: Medicare and Medicaid Payment Amounts 
Medicare  Medicaid  Potential 
HCPCS  Generic  Allowed  Amounts with  Medicare 
Code  Drug Name  Amount  Rebate  Savings 
J0635  Calcitriol  $12.83  $12.15  5.3% 
J1760  Iron Dextran  $35.82  $31.77  11.3% 
J1955  Levocarnitine  $34.20  $23.85  30.3% 
J3364  Urokinase  $56.61  $35.23  37.8% 
90747  Hepatitis B Vaccine  $172.23  $163.17  5.3% 
While we were able to determine percentage differences between the Medicare allowed amounts 
and other agencies costs for the reviewed drugs, we could not prepare a precise estimate of 
dollar savings.  The only reimbursement information available to us represented the total amount 
billed to Medicare for ESRD drugs and not the total amount which was paid.  However, if the 
percentage savings that we calculated for each drug were applied to Medicares total charges (i.e., 
the amount billed), then Medicare could have saved up to $42 million in 1998 if their allowed 
amounts equaled Medicaid amounts.  Medicare could have saved up to $162 million in 1998 if 
their allowed amounts equaled VA acquisition costs.  Because total charges are often inflated, we 
recognize that the estimates provided are the most that Medicare could have possibly saved. 
However, even if the savings did not reach these maximum levels, the potential savings would still 
be substantial. 
11 
Medicare Reimbursement of ESRD Drugs  OEI-03-00-00020  R E C O M M E N D A T I O N  
The Department of Veterans Affairs (VA) purchases drugs for its healthcare system 
directly from manufacturers or wholesalers.  Conversely, Medicare and Medicaid 
reimburse doctors and suppliers for drugs which they administer or supply to beneficiaries. 
We recognize that the Health Care Financing Administration (HCFA), Medicaid, and the 
VA operate under different statutory constraints.  Nevertheless, the fact remains that other 
government entities can get certain prescription drugs at drastically lower prices than 
Medicare. 
Our current findings provide further support for recommendations made in earlier reports. 
We previously recommended, and HCFA concurred, that HCFA re-examine its Medicare 
drug reimbursement methodologies with the goal of reducing payments as appropriate. 
We outlined a number of options for implementing this recommendation, including: (1) 
greater discounting of published average wholesale prices, (2) basing payment on 
acquisition costs, (3) establishing manufacturers rebates similar to those used in the 
Medicaid program, and (4) using competitive bidding. 
We continue to support the need for lower drug prices for the Medicare program and its 
beneficiaries.  We realize, however, that HCFAs power to lower drug prices through the 
use of its inherent reasonableness authority was recently limited by a provision of the 
Medicare, Medicaid and SCHIP Balanced Budget Refinement Act of 1999.  Therefore, we 
recommend that HCFA press for legislative efforts which would (1) immediately lower the 
price of these five ESRD drugs, (2) use the Federal Supply Schedule (FSS) as a basis for 
developing Medicare allowed amounts, or (3) reform the current drug pricing 
methodology in another manner which would substantially lower unreasonable 
prescription drug prices. 
Agency Comments 
The HCFA concurred with our recommendation, noting that basing reimbursement on 
acquisition cost is probably the best way to ensure that Medicare pays fair prices for 
covered drugs.  Additionally, HCFA gave a detailed account of their numerous attempts 
to lower unreasonable drug reimbursement amounts in the Medicare program.  Currently, 
HCFA plans to utilize a number of more accurate drug prices developed by First 
Databank, publisher of a pricing compendium used by the pharmaceutical industry.  HCFA 
requested that Medicare contractors use these prices when calculating their drug 
reimbursement amounts.  The HCFA also commented that they are working to develop a 
comprehensive electronic file on the pricing of Medicare covered drugs, and are 
continuing a competitive bidding demonstration project for albuterol in Texas.  In 
addition, HCFA is consulting with the Department of Justice and the Office of Inspector 
General on the feasibility of developing additional means to ensure that accurate drug 
pricing data is used in setting Medicare reimbursement rates.  The full text of HCFAs 
comments is presented in Appendix D. 
12 
Medicare Reimbursement of ESRD Drugs  OEI-03-00-00020  OIG Response 
We commend HCFAs efforts to lower Medicare drug reimbursement rates.  We fully 
support attempts to obtain more accurate prices for the Medicare program.  We believe 
that HCFAs request that Medicare contractors use the more accurate prices supplied by 
First Databank is a significant first step towards reimbursing drugs in a more appropriate 
manner. 
13 
Medicare Reimbursement of ESRD Drugs  OEI-03-00-00020  A P P E N D I X   A 
Previous OIG Reports on Medicare Drug Reimbursement 
Comparing Drug Reimbursement: Medicare and the Department of Veterans Affairs

(OEI-03-97-00293), November 1998.  We found that Medicare and its beneficiaries would save

$1 billion in 1998 if the allowed amounts for 34 drugs were equal to prices obtained by the VA. 

Furthermore, Medicare allowed between 15 and 1600 percent more than the VA for the 34 drugs

reviewed.

Are Medicare Allowances for Albuterol Sulfate Reasonable? (OEI-03-97-00292), 

August 1998.  We found that Medicare would allow between 56 to 550 percent more than the

VA would pay for generic versions of albuterol sulfate in 1998, and 20 percent more than the

average Medicaid payment for albuterol sulfate in 1997.  Additionally, Medicare allowed 333

percent more than available acquisition costs for the drug in 1998.  Customers of mail-order

pharmacies would pay up to 30 percent less than Medicare for albuterol sulfate in 1998. 

The Impact of High-Priced Generic Drugs on Medicare and Medicaid (OEI-03-97-00510),

July 1998.  We found that Medicare and its beneficiaries could have saved between $5 million

and $12 million for four drugs if reimbursement had not been based on higher-priced generic

versions.  Floridas Medicaid program would have saved half a million dollars for eight drugs in

1996 if higher-priced generic drugs had been reimbursed at brand prices.

Excessive Medicare Payments for Prescription Drugs (OEI-03-97-00290), December 1997. 

We found that Medicare allowances for 22 drugs exceeded actual wholesale prices by $447

million in 1996.  For more than one-third of the 22 drugs reviewed, Medicare allowed amounts

were more than double the actual wholesale prices available to physicians and supplers. 

Furthermore, we found that there was no consistency among Medicare carriers in establishing and

updating drug reimbursement amounts. 

Appropriateness of Medicare Prescription Drug Allowances (OEI-03-96-00420), May 1996. 

We found that under a drug rebate program similar to Medicaids, Medicare would have saved

$122 million for 17 prescription drugs in 1994.  Medicare could have saved an additional $144

million in 1994 had the program employed a discounted AWP drug reimbursement formula.  We

also found that the lack of an NDC-based billing system would prevent HCFA from taking

advantage of rebates and other discounted reimbursement formulas.

A Comparison of Albuterol Sulfate Prices (OEI-03-94-00392), June 1996.  We found that

many of the pharmacies surveyed charged customers less than the Medicare allowed amount for

generic albuterol sulfate.  The five buying groups surveyed had negotiated prices between 56 and

70 percent lower than Medicares reimbursement amount for the drug.

14 
Medicare Reimbursement of ESRD Drugs  OEI-03-00-00020  A P P E N D I X   A 
Suppliers Acquisition Costs for Albuterol Sulfate (OEI-03-94-00393), June 1996.  We found 
that Medicares allowances for albuterol sulfate substantially exceeded suppliers acquisition costs 
for the drug, and that the program could have saved $94 million during the 14-month review 
period if Medicare reimbursement amounts had been based on average supplier invoice costs. 
Medicare Payments for Nebulizer Drugs (OEI-03-94-00390), February 1996.  We found that 
Medicare and its beneficiaries paid about $37 million more for three nebulizer drugs in 17 states 
than Medicaid would have paid for equivalent drugs.  In addition, we found that the potential 
savings were not limited to the three nebulizer drugs and 17 states which were reviewed. 
15 
Medicare Reimbursement of ESRD Drugs  OEI-03-00-00020  A P P E N D I X   B 
Description of HCPCS Codes

HCPCS  Generic  Method of  Dosage 
Code  Name  Administration  Amount 
J0635  Calcitriol  Injection  1 mcg 
J1760  Iron Dextran  Injection  2 cc 
J1955  Levocarnitine  Injection  1 g 
J3364  Urokinase  Injection  5000 iu 
90747  Hepatitis B Vaccine  Injection  40 mcg1 
1The dosage amount for HCPCS code 90747 is defined as dialysis or immuno-suppressed patient 
dosage, which according to the Physicians Desk Reference, is equal to 40 mcg. 
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Medicare Reimbursement of ESRD Drugs  OEI-03-00-00020  A P P E N D I X   C 
State Medicaid Outpatient Drug Pricing Methodologies

State  Reimbursement Basis 
Alabama  WAC plus 9.2% 
Alaska  AWP minus 5% 
Arizona  AWP minus 10% 
Arkansas  AWP minus 10.5% 
California  AWP minus 5% 
Colorado  AWP minus 10% or WAC plus 18% 
Connecticut  AWP minus 12% 
Delaware  AWP minus 12.9% 
District of Columbia  AWP minus 10% 
Florida  WAC plus 7% 
Georgia  AWP minus 10% 
Hawaii  AWP minus 10.5% 
Idaho  AWP 
Illinois  AWP minus 10% for single-source drugs, AWP minus 12% for multi-source drugs 
Indiana  AWP minus 10% 
Iowa  AWP minus 10% 
Kansas  AWP minus 10% 
Kentucky  AWP minus 10% 
Louisiana  AWP minus 10.5% 
Maine  AWP minus 10% 
Maryland  WAC plus 10% 
Massachusetts  WAC plus 10% 
Michigan  AWP minus 13.5% or AWP minus 15.1% 
Minnesota  AWP minus 9% 
Mississippi  AWP minus 10% 
Missouri  AWP minus 10.43% 
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Medicare Reimbursement of ESRD Drugs  OEI-03-00-00020  A P P E N D I X   C 
State  Reimbursement Basis 
Montana  AWP minus 10% 
Nebraska  AWP minus 8.71% 
Nevada  AWP minus 10% 
New Hampshire  AWP minus 12% 
New Jersey  AWP minus 10% 
New Mexico  AWP minus 12.5% 
New York  AWP minus 10% 
North Carolina  AWP minus 10% 
North Dakota  AWP minus 10% 
Ohio  AWP minus 11% 
Oklahoma  AWP minus 10.5% 
Oregon  AWP minus 11% 
Pennsylvania  AWP minus 10% 
Rhode Island  WAC plus 5% 
South Carolina  AWP minus 10% 
South Dakota  AWP minus 10.5% 
Tennessee  Individual managed-care and pharmacy benefit management organizations determine 
price 
Texas  AWP minus 10.49% or WAC plus 12% 
Utah  AWP minus 12% 
Vermont  AWP minus 10% 
Virginia  AWP minus 9% 
Washington  AWP minus 11% 
West Virginia  AWP minus 12% 
Wisconsin  AWP minus 10% 
Wyoming  AWP minus 4% 
WAC=wholesalers acquisition cost; AWP=average wholesale price

Source: Pharmaceutical Benefits Under State Medical Assistance Programs, December 1998

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Medicare Reimbursement of ESRD Drugs  OEI-03-00-00020  A P P E N D I X   D 
Health Care Financing Administration Comments 
In this appendix, we present, in full, comments from the Health Care Financing 
Administration. 
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Medicare Reimbursement of ESRD Drugs  OEI-03-00-00020  A P P E N D I X   D 
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