Department of Health and Human Services 
OFFICE OF 
INSPECTOR GENERAL 
U : E M
PDATE XCESSIVE  EDICARE 
R
EIMBURSEMENT FOR 
A
LBUTEROL 
Inspector General 
January 2004 
OEI-03-03-00510  Office of Inspector General

http://oig.hhs.gov 
The mission of the Office of Inspector General (OIG), as mandated by Public Law 95-452, 
as amended, is to protect the integrity of the Department of Health and Human Services 
(HHS) programs, as well as the health and welfare of beneficiaries served by those 
programs. This statutory mission is carried out through a nationwide network of audits, 
investigations, and inspections conducted by the following operating components: 
Office of Audit Services 
The OIG's Office of Audit Services (OAS) provides all auditing services for HHS, either by 
conducting audits with its own audit resources or by overseeing audit work done by others. 
Audits examine the performance of HHS programs and/or its grantees and contractors 
in carrying out their respective responsibilities and are intended to provide independent 
assessments of HHS programs and operations in order to reduce waste, abuse, and 
mismanagement and to promote economy and efficiency throughout the department. 
Office of Evaluation and Inspections 
The OIG's Office of Evaluation and Inspections (OEI) conducts short-term management 
and program evaluations (called inspections) that focus on issues of concern to the 
department, the Congress, and the public. The findings and recommendations contained 
in the inspections reports generate rapid, accurate, and up-to-date information on the 
efficiency, vulnerability, and effectiveness of departmental programs. 
Office of Investigations 
The OIG's Office of Investigations (OI) conducts criminal, civil, and administrative 
investigations of allegations of wrongdoing in HHS programs or to HHS beneficiaries 
and of unjust enrichment by providers. The investigative efforts of OI lead to criminal 
convictions, administrative sanctions, or civil monetary penalties. The OI also oversees 
State Medicaid fraud control units, which investigate and prosecute fraud and patient 
abuse in the Medicaid program. 
Office of Counsel to the Inspector General 
The Office of Counsel to the Inspector General (OCIG) provides general legal services to 
OIG, rendering advice and opinions on HHS programs and operations and providing all 
legal support in OIG's internal operations. The OCIG imposes program exclusions and 
civil monetary penalties on health care providers and litigates those actions within the 
department. The OCIG also represents OIG in the global settlement of cases arising 
under the Civil False Claims Act, develops and monitors corporate integrity agreements, 
develops model compliance plans, renders advisory opinions on OIG sanctions to the 
health care community, and issues fraud alerts and other industry guidance.  E X E C U T I V E   S U M M A R Y

OBJECTIVE 
To update data provided in a 2002 report comparing Medicare 
reimbursement for albuterol to prices available to Medicaid, the 
supplier community, and the Department of Veterans Affairs 
(VA). 
BACKGROUND 
Albuterol is an inhalation drug commonly used with a nebulizer 
to treat patients suffering from asthma or emphysema. Prior to 
2004, Medicares reimbursement methodology for albuterol and 
other prescription drugs was set forth in section 1842(o) of the 
Social Security Act, as amended by section 4556 of the Balanced 
Budget Act of 1997. At the time, reimbursement for a covered 
drug was set at 95 percent of the drugs average wholesale price 
(AWP). Recently, the Medicare Prescription Drug, 
Improvement, and Modernization Act of 2003 lowered 
reimbursement for many Part B drugs, including albuterol. In 
2004, Medicare reimbursement for albuterol will be 80 percent 
of AWP. 
Medicare beneficiaries are responsible for paying a 20 percent 
coinsurance payment for covered drugs. In calendar year (CY) 
2002, Medicare and its beneficiaries paid $412 million for the 
unit-dose solution form of albuterol, up from $296 million in CY 
2000. 
Albuterol is usually provided to Medicare beneficiaries by 
pharmacies, which then submit claims for reimbursement to 
Medicare. Medicaid beneficiaries also obtain albuterol through 
pharmacies. Pharmacies can purchase drug products through 
group purchasing organizations (GPOs), wholesalers, and 
directly from manufacturers. Unlike Medicare and Medicaid, 
VA provides veterans with drugs purchased directly from 
manufacturers or wholesalers. There are several purchase 
options available to VA, including the Federal Supply Schedule, 
blanket purchase agreements, and VA national contracts. 
We obtained Medicares CY 2003 reimbursement amount for 
albuterol. For comparison, we: (1) obtained Medicaids 2003 
reimbursement amount for albuterol by reviewing the Federal 
Upper Limit list, (2) estimated 2003 pharmacy acquisition costs 
OEI-03-03-00510  UPDATE:  EXCESSIVE MEDICARE REIMBURSEMENT FOR ALBUTEROL  i  E X E C U T I V E   S U M M A R Y  
for albuterol by obtaining pricing information from a national 
wholesaler/distributor and a GPO, and (3) determined the VAs 
2003 payment amount for albuterol by accessing pricing data 
available on its website. We also obtained manufacturer-
reported wholesale acquisition costs (WACs) from the January 
2003 edition of the Drug Topics Red Book. We calculated 
potential savings by multiplying Medicares 2002 total payments 
for albuterol by the percentage difference between the Medicare 
reimbursement amount and the Medicaid reimbursement 
amount. 
The exact savings estimates presented in this report are for 
2002. Because the 2004 reimbursement amount for albuterol 
was lowered to 80 percent of AWP from 95 percent of AWP, the 
savings that Medicare would achieve by paying the Medicaid 
Federal Upper Limit Amount would now be lower. However, the 
difference in price between Medicare and Medicaid would still be 
large, and significant savings would still result if Medicare were 
able to reimburse albuterol at the Federal Upper Limit amount. 
FINDINGS 
Medicare continues to pay more for albuterol than other 
payors, costing the program and its beneficiaries millions of 
dollars a year. In 2003, the Centers for Medicare & Medicaid 
Services (CMS) set the Medicaid Federal Upper Limit amount 
for albuterol at $0.17 per milligram (mg), compared to $0.47 per 
mg for Medicare. If Medicare could reimburse for albuterol at 
the Federal Upper Limit amount, the program would have saved 
$263 million in 2002. Approximately $53 million of the savings 
would have resulted from reduced coinsurance payments. 
Data collected from a drug wholesaler/distributor and a GPO 
showed that pharmacies were able to purchase albuterol for 
substantially less than the Medicare reimbursement amount.  In 
spring 2003, the median price of albuterol at both the 
wholesaler/distributor and GPO was $0.06 per mg. Medicares 
reimbursement amount of $0.47 per mg was nearly eight times 
more for the same amount of the drug. We did not collect data 
from pharmacies regarding any additional costs related to 
providing albuterol to Medicare beneficiaries. 
OEI-03-03-00510  UPDATE:  EXCESSIVE MEDICARE REIMBURSEMENT FOR ALBUTEROL  ii  E X E C U T I VE   S U M M A R Y  
Furthermore, manufacturer-reported WACs published in the 
Red Book also showed that pharmacies were able to purchase 
albuterol for prices substantially below the Medicare 
reimbursement amount. In January 2003, the median WAC 
reported in the Red Book was $0.08 per mg. 
If Medicare were able to use prices available to the supplier 
community as a basis for albuterol reimbursement, the program 
and its beneficiaries would save millions of dollars a year. 
Since our 2002 report, which was based on 2001 data, the price 
at which albuterol was available to the supplier community had 
decreased, while the Medicare reimbursement amount had 
remained the same. In 2001, we calculated that the median 
price of albuterol through wholesaler/distributors and GPOs was 
$0.08 per mg, 33 percent higher than the 2003 price of $0.06 per 
mg. In addition, manufacturer-reported WACs had also 
decreased, from a median of $0.11 per mg in 2001 to $0.08 in 
2003. 
The median Federal Supply Schedule price available to VA for 
generic albuterol was $0.05 per mg. In comparison, Medicare 
reimbursed over 9 times more ($0.47 per mg) for the same 
amount of the drug in 2003. However, it should be noted that, 
unlike Medicare, VA purchases drugs for its health care system 
directly from manufacturers or wholesalers, rather than 
reimbursing pharmacies for the drug.  Both the VA Federal 
Supply Schedule price and the Medicare reimbursement amount 
for albuterol have remained constant since our previous report. 
CONCLUSION 
Despite numerous attempts by CMS to lower reimbursement 
amounts for prescription drugs, Medicare still pays a high 
premium for albuterol. This report is part of a series of reports 
on albuterol that have consistently found that the published 
average wholesale prices, which, as prescribed by Federal law, 
form the basis of Medicare drug reimbursement, bear little or no 
resemblance to actual wholesale prices that are available to 
pharmacies and large Government purchasers. 
Because of Medicares reliance on published average wholesale 
prices, the programs reimbursement remains constant, despite 
the fact that other purchasers pay significantly less for albuterol 
OEI-03-03-00510  UPDATE:  EXCESSIVE MEDICARE REIMBURSEMENT FOR ALBUTEROL  iii  E X E C U T I V E   S U M M A R Y  
than they did several years ago. In addition, Medicares total 
reimbursement for albuterol continues to increase substantially 
each year. Consequently, the Medicare program loses 
progressively more money every year. 
We understand that, unlike most drugs covered by Medicare, 
albuterol is usually provided by pharmacies rather than 
administered by physicians. These pharmacies obviously need 
to make a profit from the products they supply, yet the spread 
between what Medicare reimburses for albuterol and the price 
at which suppliers are able to purchase the drug is significant. 
Furthermore, we recognize that the VA acts as a purchaser of 
drugs, while Medicare reimburses pharmacies for the product. 
However, the fact that one Government agency is able to 
purchase a drug for one-ninth of Medicares reimbursement 
amount is disconcerting. 
Congress has recently passed the Medicare Prescription Drug, 
Improvement, and Modernization Act of 2003 (Act). This Act 
provides for numerous changes in Medicares reimbursement 
methodology for drugs covered under Part B, including 
albuterol. Based on this new Act, Medicare will reimburse 
albuterol at 80 percent of AWP in 2004. We hope that the data 
presented in this report is helpful to CMS in determining an 
appropriate payment amount for the drug beyond 2004. 
OEI-03-03-00510  UPDATE:  EXCESSIVE MEDICARE REIMBURSEMENT FOR ALBUTEROL  iv  T A B L E   O F   C O N T E N T S

E X E C U T I V E   S U M M A R Y  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . .   i

I N T R O D U C T I O N . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . .  1

F I N D I N G S

Medicare continues to pay more than other payors for albuterol.................... 7

C O N C L U S I O N  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . .  10

A C K N O W L E D G M E N T S  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . .  11

OEI-03-03-00510  UPDATE:  EXCESSIVE MEDICARE REIMBURSEMENT FOR ALBUTEROL  v
 I N T R O D U C T I O N

OBJECTIVE 
To update data provided in a 2002 report comparing Medicare 
reimbursement for albuterol to prices available to Medicaid, the 
supplier community, and the Department of Veterans Affairs 
(VA). 
BACKGROUND 
Medicare Coverage of Albuterol 
Currently, Medicare Part B does not pay for over-the-counter or 
most outpatient prescription drugs. However, Medicare Part B 
will cover drugs that are necessary for the effective use of 
durable medical equipment. One such product, albuterol, is an 
inhalation solution commonly used with a nebulizer to treat 
patients suffering from asthma or emphysema. Albuterol is 
typically provided to Medicare beneficiaries by pharmacies. 
Medicare Reimbursement of Albuterol 
The Centers for Medicare & Medicaid Services (CMS) contracts 
with four companies, known as durable medical equipment 
regional carriers (DMERCs), to process and reimburse medical 
equipment and supply claims, including albuterol. Each 
DMERC is responsible for determining the reimbursement 
amount for albuterol in their respective region, based on 
Medicares reimbursement methodology. 
Prior to 2004, Medicare=s reimbursement methodology for 
albuterol and other prescription drugs was set forth in section 
1842(o) of the Social Security Act, as amended by section 4556 of 
the Balanced Budget Act of 1997. At the time, the Social 
Security Act stated that reimbursement for covered drugs was to 
be set at 95 percent of the drugs average wholesale price (AWP). 
CMS directed carriers to obtain AWP data from the Drug Topics 
Red Book or similar pricing publications used by the 
pharmaceutical industry. In 2003, each DMERC reimbursed 
$0.47 per milligram (mg) for the unit-dose solution form of 
albuterol. 
Recently, the Medicare Prescription Drug, Improvement, and 
Modernization Act of 2003 (Act) lowered reimbursement for 
many Part B drugs in 2004 and beyond by revising section 
OEI-03-03-00510  UPDATE:  EXCESSIVE MEDICARE REIMBURSEMENT FOR ALBUTEROL  1  I N T R O D U C T I O N  
1842(o) of the Social Security Act. According to the new Act, the 
payment for a drug contained in the table, Medicare Part B 
Drugs in Most Recent GAO and OIG Studies published in the 
Federal Register (68 FR 50445) will be the percentage of the 
AWP indicated in the table. If the percentage in the table is less 
than 80 percent, then the percentage applied to reimbursement 
will be 80 percent. Based on the data presented in this table, in 
2004, Medicare reimbursement for albuterol will be 80 percent 
of AWP. 
Medicare paid $412 million for the unit-dose solution form of 
albuterol in calendar year (CY) 2002, up from $296 million in 
CY 2000. This total represents 5 percent of the $8.2 billion 
Medicare paid for all prescription drugs in 2002. Medicare 
payments include both the 80 percent that Medicare reimburses, 
and the 20 percent coinsurance payment for which beneficiaries 
are responsible. 
CMS Use of Office of Inspector General (OIG) Data 
In a proposed rule published in the Federal Register on August 
20, 2003, CMS states, If the OIG performs a new market 
analysis, we expect to incorporate this information into the 
Medicare payment limits...Initially, we would use the market 
analyses available to us from GAO and OIG studies to transition 
widely available market prices into the Medicare payments. 
Because of the passage of the Medicare Prescription Drug, 
Improvement, and Modernization Act of 2003, the proposed rule 
did not take effect. However, according to this Act, new pricing 
data may be useful for setting Medicare reimbursement 
amounts in the future. 
Recent Attempts to Lower Medicare Reimbursement 
Inherent Reasonableness.  Section 4316 of the Balanced Budget 
Act of 1997 allows CMS to diverge from Medicare=s statutorily-
defined payment method if the method results in payment 
amounts that are not inherently reasonable. In late 1998, CMS 
attempted to use this authority to lower what it considered 
excessive reimbursement for several items. One of these items 
was albuterol, which was targeted for an 11 percent fee 
reduction. However, the lower prices were never implemented, 
as Congress suspended the use of CMSs inherent 
reasonableness authority through a provision of the Medicare, 
Medicaid, and SCHIP Balanced Budget Refinement Act of 1999. 
OEI-03-03-00510  UPDATE:  EXCESSIVE MEDICARE REIMBURSEMENT FOR ALBUTEROL  2  I N T R O D U C T I O N  
This provision required the General Accounting Office (GAO) to 
complete a study on the potential effects of using inherent 
reasonableness measures before CMS could invoke the 
authority. The GAO report, issued in July 2000, found that 
inherent reasonableness reductions for some items were 
justified. However, GAO questioned the methodology that the 
carriers used in their collection of pricing data for albuterol. 
On February 11, 2003, a new interim final rule for the 
application of inherent reasonableness went into effect. 
According to the regulation, payment amounts may be 
considered unreasonable based on a number of criteria, 
including: (1) payment amounts are grossly excessive when 
compared to other purchasers in the same locality, or (2) 
payment amounts are grossly excessive when compared to 
acquisition costs. According to the regulation, a payment 
amount is considered grossly excessive if a reduction of at least 
15 percent is required to produce a realistic and equitable 
reimbursement amount. 
Competitive Bidding.  CMS included albuterol and several other 
inhalation drugs in a competitive bidding project in the San 
Antonio, Texas area that sought to use market forces to set 
accurate prices for durable medical equipment and related 
supplies. In November 2000, CMS announced the selection of 
durable medical equipment suppliers who had submitted 
competitive bids for the included items. New prices for these 
items went into effect in the bidding area on February 1, 2001. 
The new reimbursement amount for albuterol set by the 
competitive bidding process was $0.32 per mg, approximately 32 
percent below the usual Medicare price. CMS hopes to use the 
results from these demonstrations more generally in the 
Medicare program. 
Medicaid Reimbursement of Albuterol 
As with Medicare, Medicaid beneficiaries typically receive 
albuterol from pharmacies. Pharmacies are then reimbursed by 
the Medicaid program. 
Federal regulations require that each State Medicaid agencys 
reimbursement for a drug not exceed the lower of its estimated 
acquisition cost plus a reasonable dispensing fee, or the 
providers usual and customary charge to the public for the 
drug. CMS allows States flexibility in defining estimated 
OEI-03-03-00510  UPDATE:  EXCESSIVE MEDICARE REIMBURSEMENT FOR ALBUTEROL  3  I N T R O D U C T I O N  
acquisition cost. Like Medicare, most States base their 
calculation of estimated acquisition cost on a drugs AWP 
discounted by a certain percentage. This discount ranged from 5 
percent to 15 percent in the year 2001. A few States use 
published wholesale acquisition costs (WACs) plus a percentage 
markup rather than AWPs when calculating estimated 
acquisition cost. 
For certain drugs, States also use the Federal Upper Limit and 
State Maximum Allowable Cost programs in determining 
reimbursement amounts. According to CMS, the purpose of 
Federal Upper Limits is to ensure that the Federal Government 
acts as a prudent purchaser by taking advantage of current 
market prices for multiple-source products. CMS has 
established Federal Upper Limit amounts for over 400 drugs. In 
addition, more than half of the States have implemented a 
Maximum Allowable Cost program in order to reduce 
reimbursement amounts for certain drugs. Individual States 
determine the types of drugs that are included in their 
Maximum Allowable Cost program, and the method by which 
the Maximum Allowable Cost for a drug is calculated. 
Acquisition Sources of Albuterol for Pharmacies 
Pharmacies can purchase drug products through several 
sources, including group purchasing organizations (GPOs), 
wholesalers/distributors, and directly from manufacturers. 
GPOs provide their members with lower cost products by 
negotiating prices for specific drugs from manufacturers. The 
member can then purchase drugs at the negotiated price either 
directly from the manufacturer or from a wholesaler/distributor 
who accepts GPOs price. Wholesalers/distributors purchase 
large volumes of drugs from manufacturers and sell them 
directly to physicians, suppliers, and pharmacies. 
VA Payments for Albuterol 
Unlike Medicare and Medicaid, VA purchases drugs for its 
health care system directly from manufacturers or wholesalers. 
There are several options available to VA when purchasing 
drugs, with the most common being the Federal Supply 
Schedule. The Federal Supply Schedule provides agencies like 
VA with a simple process for purchasing commonly-used 
products in any quantity while still obtaining the discounts 
associated with volume buying. Using competitive procedures, 
OEI-03-03-00510  UPDATE:  EXCESSIVE MEDICARE REIMBURSEMENT FOR ALBUTEROL  4  I N T R O D U C T I O N  
contracts are awarded to companies to provide supplies over a 
given period of time at the Federal Supply Schedule price. 
However, VA is sometimes able to negotiate prices lower than 
Federal Supply Schedule amounts through other avenues, such 
as blanket purchase agreements and VA national contracts. 
Related Work on Albuterol 
OIG has consistently found that Medicares usual 
reimbursement amount for albuterol (based on AWP) is 
excessive. For example, in our report Excessive Medicare 
Reimbursement for Albuterol (March 2002), we calculated that 
the Medicare reimbursement amount for albuterol in 2000 was 
more than 9 times higher than the VA purchase price, and 
nearly 6 times the actual acquisition cost to pharmacies. 
According to our findings, excessive reimbursement for albuterol 
alone was costing Medicare and its beneficiaries up to $264 
million per year. 
In another of our reports, Medicare Reimbursement for 
Albuterol  (June 2000), we found that Medicare would have 
saved almost $120 million in 1999 by reimbursing for albuterol 
at the amount paid by Medicaid. 
In addition to the OIG, GAO has also found that Medicare 
reimbursement for albuterol is excessive. In its September 2001 
report, Medicare: Payments for Covered Outpatient Drugs 
Exceed Providers Costs (GAO-01-1118), GAO found that the 
average widely available price to pharmacies for albuterol was 
85 percent below the published AWP of the drug. 
METHODOLOGY 
We reviewed laws and regulations concerning Medicare drug 
reimbursement. We accessed CMSs Part B Extract Summary 
System to determine Medicares total payments for the unit-dose 
solution form of albuterol in CY 2002. We obtained Medicares 
CY 2003 reimbursement amounts for albuterol from all 4 
DMERCs. 
To determine Medicaids 2003 reimbursement amount for 
albuterol, we obtained pricing information for the drug from the 
Medicaid Federal Upper Limit list. 
To estimate pharmacy acquisition costs for albuterol, we 
obtained spring 2003 pricing information for albuterol from a 
OEI-03-03-00510  UPDATE:  EXCESSIVE MEDICARE REIMBURSEMENT FOR ALBUTEROL  5  II NN TT RR OO DD UU CC TT II OO NN  
national wholesaler/distributor and from a GPO. As an 
additional estimate of pharmacy acquisition costs, we also 
obtained manufacturer-reported WACs from the January 2003 
edition of the Red Book.  The Red Book defines WAC as 
manufacturer-quoted list prices to wholesale distributors. These 
prices are not reflective of bids, rebates, volume purchase 
agreements, or other types of exclusive contracts. 
To determine the VAs 2003 payment amounts for albuterol, we 
accessed a file on their website that lists prices available to the 
agency through the Federal Supply Schedule. 
To calculate potential Medicare savings based on Medicaid, we 
compared Medicares reimbursement amount for 1 mg of 
albuterol to the Medicaid Federal Upper Limit amount. We 
determined the percentage difference in price by subtracting 
Medicaids price from Medicares price and then dividing the 
result by the Medicare price. This percentage indicates how 
much Medicare would save if the program could base 
reimbursement on the Medicaid Federal Upper Limit amount. 
We then multiplied the percentage difference by the total 
amount Medicare paid for albuterol in 2002 to calculate dollar 
savings. 
The exact savings estimates presented in this report are for 
2002. Because the 2004 reimbursement amount for albuterol 
was lowered to 80 percent of AWP from 95 percent of AWP, the 
savings that Medicare would achieve by paying the Medicaid 
Federal Upper Limit amount would now be lower. However, the 
difference in price between Medicare and Medicaid would still be 
large, and significant savings would still result if Medicare were 
able to reimburse albuterol at the Federal Upper Limit amount. 
This study was conducted in accordance with the Quality 
Standards for Inspections issued by the President=s Council on 
Integrity and Efficiency. 
OEI-03-03-00510  UPDATE:  EXCESSIVE MEDICARE REIMBURSEMENT FOR ALBUTEROL  6  F I N D I N G S

In 2003, Medicare reimbursed $0.47 per mg for albuterol, an 
amount that was considerably higher than the reimbursement 
amounts of other Government payers and the prices available to 
the supplier community. If 
Medicare continues to pay more for albuterol than 
Medicare were able to base its
other payers, costing the program and its 
reimbursement amount for 
beneficiaries millions of dollars a year. 
albuterol on prices available to 
these sources, the program and its beneficiaries could have 
saved millions of dollars in 2002. Chart 1 below compares the 
Medicare reimbursement amount to prices available to 
Medicaid, the supplier community, and VA. 
Chart 1: Comparison of Albuterol Prices 
$0.50 
$0.47 
$0.45 
$0.40 
$0.35 
$0.30 
nt 
u
o $0.25 
m
A
$0.20 
$0.17 
$0.15 
$0.10  $0.08 
$0.06 $0.06 
$0.05 
$0.05 
$0.00 
Median VA  Median  Median GPO  Median WAC  Medicaid  Medicare 
Wholesaler  Federal Upper 
Limit 
Source: VA website, OIG survey of pharmacy prices, 2003 Red Book , Medicaid Federal Upper Limit list, and 
DMERC pricing publications. 
Medicare and its beneficiaries would have saved $263 million in 2002 if 
the program were able to reimburse albuterol at the Medicaid Federal 
Upper Limit amount. 
CMS sets the Medicaid Federal Upper Limit amount for albuterol at 
$0.17 per mg, compared to $0.47 per mg for Medicare. If Medicare 
were able to reimburse for albuterol at the Medicaid Federal Upper 
Limit amount, the program would have saved $263 million in 2002. 
Approximately $53 million of the savings would have had a direct 
OEI-03-03-00510  UPDATE:  EXCESSIVE MEDICARE REIMBURSEMENT FOR ALBUTEROL  7  F I N D I N G S  
impact on Medicare beneficiaries in the form of reduced coinsurance 
payments. 
The Medicare reimbursement amount for albuterol was eight times 
higher than the median price available to the supplier community. 
Data collected from a drug wholesaler and a GPO showed that 
pharmacies were able to purchase albuterol for substantially 
less than the Medicare reimbursement amount. In spring 2003, 
the unit-dose solution form of albuterol was available from these 
sources at prices ranging from a low of $0.05 per mg to a high of 
$0.10 per mg. The median price of albuterol at both the 
wholesaler/distributor and GPO was $0.06 per mg. Medicares 
reimbursement amount of $0.47 per mg was nearly eight times 
more for the same amount of the drug. 
Pharmacies were able to acquire albuterol for less than a 
Medicare beneficiary would pay in coinsurance alone ($0.09 per 
mg). For example, a beneficiary using a typical monthly supply 
of albuterol (250 mg) would pay $23.50 in Medicare coinsurance. 
Through the sources we identified, pharmacies, on average, 
would pay just $15.00 for the same supply. We did not collect 
data from pharmacies regarding any additional costs related to 
providing albuterol to Medicare beneficiaries. 
Furthermore, manufacturer-reported WACs published in the 
Red Book also showed that pharmacies were able to purchase 
albuterol for prices substantially below Medicare. In January 
2003, the median WAC reported in the Red Book was $0.08 per 
mg.  The Red Book defines WAC as manufacturer-quoted list 
prices to wholesale distributors, not reflective of bids, rebates, 
volume purchase agreements, or other types of exclusive 
contracts. 
Since our last report, the price at which albuterol was available 
to the supplier community decreased, while the Medicare 
reimbursement amount remained the same. In 2001, we 
calculated that the median price of albuterol through 
wholesaler/distributors and GPOs was $0.08 per mg, 33 percent 
higher than the 2003 price of $0.06 per mg. In addition, 
manufacturer-reported WACs also decreased from a median of 
$0.11 per mg in 2001 to $0.08 in 2003. 
OEI-03-03-00510  UPDATE:  EXCESSIVE MEDICARE REIMBURSEMENT FOR ALBUTEROL  8  F I N D I N G S  
If Medicare were able to use prices available to the supplier 
community as a basis for albuterol reimbursement, the program 
and its beneficiaries would save millions of dollars a year. 
The Medicare reimbursement amount for albuterol was over nine times 
higher than the median price available to VA. 
In 2003, the median Federal Supply Schedule price available to VA 
for albuterol was $0.05 per mg. In comparison, Medicare reimbursed 
nine times more ($0.47 per mg) for the same amount of the drug. 
However, it should be noted that, unlike Medicare, VA purchases 
drugs for its health care system directly from manufacturers or 
wholesalers, rather than reimbursing pharmacies for the drug. 
Both the VA Federal Supply Schedule price and the Medicare 
reimbursement amount for albuterol have remained constant 
since our previous report (Excessive Medicare Reimbursement 
for Albuterol) in 2002 (based on 2001 data). The 2003 VA price, 
however, was still over 50 percent lower than it was in 1998 
($0.11 per mg), while the Medicare price had not changed during 
the same 5-year period. 
OEI-03-03-00510  UPDATE:  EXCESSIVE MEDICARE REIMBURSEMENT FOR ALBUTEROL  9  C O N C L U S I O N

Despite numerous attempts by CMS to lower reimbursement 
amounts for prescription drugs, Medicare still pays a high 
premium for albuterol. This report is part of a series of reports 
on albuterol which have consistently found that the published 
AWPs, which, as prescribed by Federal law, form the basis of 
Medicare drug reimbursement, bear little or no resemblance to 
actual wholesale prices that are available to pharmacies and 
large Government purchasers. 
Because of Medicares reliance on published AWPs, the 
programs reimbursement remains constant, despite the fact 
that other purchasers pay significantly less for albuterol than 
they did several years ago. In addition, Medicares total 
reimbursement for albuterol continues to increase substantially 
each year. Consequently, the Medicare program loses 
progressively more money every year. 
We understand that, unlike most drugs covered by Medicare, 
albuterol is usually provided by pharmacies rather than 
administered by physicians. These pharmacies obviously need 
to make a profit from the products they supply, yet the spread 
between what Medicare reimburses for albuterol and the price 
at which suppliers are able to purchase the drug is significant. 
Furthermore, we recognize that the VA acts as a purchaser of 
drugs, while Medicare reimburses pharmacies for the product. 
However, the fact that one Government agency is able to 
purchase a drug for one-ninth of Medicares reimbursement 
amount is troubling. 
Congress has recently passed the Medicare Prescription Drug, 
Improvement, and Modernization Act of 2003 (Act). This Act 
provides for numerous changes in Medicares reimbursement 
methodology for drugs covered under Part B, including 
albuterol. Based on this new Act, Medicare will reimburse 
albuterol at 80 percent of AWP in 2004. We hope that the data 
presented in this report is helpful to CMS in determining an 
appropriate payment amount for the drug beyond 2004. 
OEI-03-03-00510  UPDATE:  EXCESSIVE MEDICARE REIMBURSEMENT FOR ALBUTEROL  10  A C K N O W L E D G M E N T S

This report was prepared under the direction of Robert A Vito, 
Regional Inspector General for Evaluation and Inspections in 
the Philadelphia Regional Office, and Linda M. Ragone, Deputy 
Regional Inspector General. Other principal Office of 
Evaluation and Inspections staff who contributed include: 
David Tawes, Team Leader 
Cynthia Hansford, Program Assistant 
Linda Frisch, Program Specialist 
OEI-03-03-00510  UPDATE:  EXCESSIVE MEDICARE REIMBURSEMENT FOR ALBUTEROL  11