Department of Health and Human Services
 
OFFICE OF 

   
INSPECTOR GENERAL 

 
 
 
 
 
 
 
 
A  COM  PARISON OF AVERAGE 

 
S P W
ALES  RICES TO  IDELY 

 
 
A M P
VAILABLE  ARKET  RICES FOR 

 
I   D  
NHALATION  RUGS 

 
 
 
 
Daniel R. Levinson 
  
Inspector General 

 
July 2008 
 
OEI-03-07-00190 
   
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 Office  of  Audit Services  (OAS) provides 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.  These assessments help reduce waste, abuse, and  
mismanagement and promote economy and efficiency  throughout  HHS. 
Office of Evaluation and Inspections  
The Office  of  Evaluation and Inspections (OEI)  conducts national evaluations to  provide HHS, 
Congress, and the public with timely, useful, and reliable information on significant issues.  
These evaluations focus on preventing fraud, waste, or  abuse and  promoting economy, 
efficiency, and effectiveness of departmental programs.  To promote impact, OEI reports also  
present practical recommendations for improving program operations.  
Office of Investigations 
The Office of Investigations (OI) conducts criminal, civil, and administrative investigations  of 
fraud and misconduct related to HHS programs, operations, and beneficiaries.   With 
investigators working in all 50 States and the District of Columbia, OI utilizes its resources by  
actively coordinating with the Department  of  Justice and  other Federal, State, and local law 
enforcement  authorities.  The  investigative efforts of OI often lead  to  criminal convictions,  
administrative sanctions, and/or civil monetary penalties. 
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 for  OIGs internal operations.  OCIG represents  OIG in all civil and administrative 
fraud and abuse cases involving HHS programs, including False Claims Act, program 
exclusion,  and civil monetary penalty cases.  In  connection with these  cases, OCIG also  
negotiates and monitors  corporate integrity agreements.  OCIG renders advisory opinions, 
issues compliance program guidance, publishes fraud alerts, and  provides other guidance to  
the health care industry concerning the anti-kickback statute and  other OIG enforcement 
authorities.  
   
   
E X E C U T I V E   S U M M A R Y  
  E X E C U T I V E   S U M M A R Y  
OBJECTIVE 
 
To determine whether the volume-weighted average sales  price (ASP) 
exceeded the widely available market  price by at least 5 percent for any 
of the five inhalation drugs under review. 
BACKGROUND 
Sections 1847A(d)(1) and (2) of the Social Security Act (the Act), as 
added by the Medicare  Prescription Drug, Improvement, and  
Modernization Act of 2003, P.L. No. 108-173, direct the Office of 
Inspector General (OIG) to undertake pricing studies that compare 
ASPs to widely available market prices and average manufacturer 
prices (AMP).  If OIG finds that the ASP for a drug exceeds the widely 
available market price by a certain threshold (currently 5 percent), 
section 1847A(d)(3) of the Act states that the Secretary of the 
Department of Health and Human Services (the Secretary) may 
disregard the ASP for the drug when setting reimbursement.  After  
being so informed by OIG, the Secretary shall substitute the payment 
amount for that drug (typically 106 percent of the ASP) with the lesser 
of the widely available market price, or 103 percent of the AMP 
pursuant to section 1847A(d)(3)(C) of the Act.  Section 1847A(d)(5)(A) of 
the Act defines widely available market price as the price that a 
prudent physician or supplier would pay for the drug, net of  any 
routinely available price concessions.   
We collected pricing and sales data for the top five inhalation drug codes  
(according to 2006 utilization data) from 24 distributors.  To calculate 
the widely available market prices, we divided the total sales  (net of 
discounts, where available) for the second quarter of 2007, i.e., April 1 
through June 30, 2007, by the total number of units sold during the 
same quarter. For the five drug  codes under review, we compared  
fourth-quarter 2006 volume-weighted ASPs (the basis of second-quarter 
2007 Medicare payment amounts) to second-quarter 2007 widely 
available market prices and identified codes for  which the ASP exceeded  
the widely available market price by at least 5 percent.  We estimated 
the amount that Medicare would have saved by lowering 
reimbursement to the widely available market price for any codes that 
met or exceeded the 5-percent threshold.    
After data collection began, the Centers for Medicare & Medicaid 
Services (CMS) changed the way in which it pays for two of the 
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E X E C U T I V E   S U M M A R Y   
inhalation drugs under review (albuterol and levalbuterol).  As  
explained in a May 2007 coding announcement, CMS reestablished a 
single drug code for albuterol and levalbuterol effective July 1, 2007.  
Payment for the new code was based  on a combination of ASPs for both  
drugs. 
The application of a provision in the Medicare, Medicaid, and SCHIP 
Extension Act of 2007 (Extension Act) effectively required separate 
payment amounts for albuterol and levalbuterol beginning in             
April 2008.  After we completed our analysis, but before we issued a 
draft report, CMS established separate payment amounts for albuterol 
and levalbuterol, as required by the Extension Act. 
FINDINGS 
The volume-weighted average sales price for two of the five 
inhalation drugs under review  exceeded the  widely available market 
price by at least 5 percent in the second quarter of 2007. In the 
second quarter of 2007, two of the five codes included in this analysis 
surpassed the threshold specified in section 1847A(d)(3)(B) of the Act.  
For albuterol, the volume-weighted  ASP exceeded the widely available 
market price by 85 percent; for levalbuterol, the  volume-weighted ASP 
exceeded the widely available market price by 19 percent.  Had  
Medicare payment amounts for albuterol and levalbuterol been based on  
widely available market prices in the second quarter of 2007, we 
estimate that Medicare  expenditures  would have  been  reduced by      
$27 million. 
Because of CMSs May 2007 coding change, the Medicare payment 
amount for albuterol in the third quarter of 2007 may have been     
13 times greater than its widely available market price.  As reflected 
in the May 2007 coding announcement, CMS reestablished a single drug 
code for albuterol and levalbuterol  and based  Medicare payment for 
these drugs  on the ASPs of both products effective July 1, 2007.  From 
the second to the third quarter of 2007, this coding change resulted in a 
650-percent increase in the Medicare payment amount for albuterol and 
a 66-percent decrease in the Medicare payment amount for levalbuterol.  
Assuming that the market prices did not change substantially in 
subsequent quarters, the new payment amount was 13 times greater 
than the widely available market price for albuterol and 57 percent less 
than the widely available market price for levalbuterol in the third  
quarter of 2007.  
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E X E C U T I V E   S U M M A R Y
   
SUMMARY 
OIG compared ASPs to widely available market prices to identify 
instances in which the volume-weighted ASPs for five inhalation drugs 
exceeded the widely available market price by a threshold of 5 percent.  
We identified two drugs (albuterol and levalbuterol) that exceeded the  
5-percent threshold in the second quarter of 2007.  However, CMS 
established a single payment code and amount for albuterol and 
levalbuterol effective July 1, 2007.  As a result of this change, the 
Medicare payment amount for albuterol in the third quarter of 2007 
may have been 13 times  greater than the widely available market price 
in the previous quarter.  In contrast, the Medicare payment  amount for 
levalbuterol in the third quarter of 2007 was 57 percent below the 
widely available market price in the previous quarter. 
After we completed our analysis, but before we issued a draft report, 
CMS separated albuterol and levalbuterol back into two codes, thereby 
establishing separate payment amounts for the two drugs.  As of           
April 1, 2008, the new Medicare payment amount for albuterol is   
$0.044 per milligram, an amount very close to the widely available 
market price ($0.041) we calculated for the second quarter of 2007.  The 
new Medicare payment  amount for levalbuterol under the new 
calculation method required by the Extension Act is $0.280 per           
0.5 milligrams, which is substantially lower than the widely available 
market price of $1.218 from the second quarter of 2007.  In future 
studies, OIG will continue to monitor the utilization of and payment for 
inhalation drugs. 
AGENCY COMMENTS  
CMS states that the Extension Act not only established a special 
payment rule for certain inhalation drugs included in this study but 
also revised  the volume-weighting methodology for determining 
payments based on the ASP.  As a result, CMS believes that there are 
limitations to this studys methodology and findings directly related to 
the calculation of the volume-weighted ASP.  In addition, CMS notes 
that because levalbuterol is required to be treated as a multiple-source 
drug for payment purposes, the agency is concerned that OIGs pricing 
comparison  for the drug may not be  accurate.    
 
 
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E X E C U T I V E   S U M M A R Y
   
OFFICE OF INSPECTOR GENERAL RESPONSE 
OIG notes that, unlike the methodology for determining the ASP, the 
methodology for determining the widely available market price is not 
explicitly defined in statute.  Rather, the statute indicates that OIGs 
determination of this price should reflect what a prudent physician or 
supplier would pay for a drug based on data collected from any number 
of specified sources taking into account price concessions.  In meeting 
this requirement, we calculated the widely available market price in a 
manner (total sales divided by total units sold) consistent with the ASP 
calculation as defined by the Extension Act, rather than CMSs now 
discontinued methodology.     
Furthermore, we understand that provisions of the Act require 
levalbuterol to be classified  as a multiple-source drug for payment 
purposes.  However, the widely available market price that we  
calculated illustrates how the Medicare payment amount determined 
under the method required by the Extension Act  compares to the actual 
price of the drug in the  marketplace.     
   
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  T A B L E   O F   C O N T E N T S  
EXECUTIVE SUMMARY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . i
  
 
 
I N T RO DUC T IO N  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  1 
  
 
 
F I N D IN G S  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  10 
  
  ASPs exceeded widely available market prices for two drugs. . . .  10 
  
  Payment for albuterol is higher than its market price  . . . . . . . . .  11
  
 
SUMMARY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  13 

  Agency Comments  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  13 
  
  Office of Inspector General Response. . . . . . . . . . . . . . . . . . . . . . .  14 
  
 
APPENDIXES  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  16 
  
  A:	  Changes to Medicare Payment Methodology for Albuterol 
 ..........
        and Levalbuterol. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  16 
  
B:	  Agency Comments  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  19 
  
  
A C K NO WL E D G M E N T S  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  21 
  
   
   
  I N T R O D U C T I O N
OBJECTIVE 
To determine whether the volume-weighted average sales  price (ASP) 
exceeded the widely available market  price by at least 5 percent for any 
of the five inhalation drugs under review. 
BACKGROUND 
Sections 1847A(d)(1) and (2) of the Social Security Act (the Act), as 
added by the Medicare  Prescription Drug, Improvement, and  
Modernization Act of 2003 (MMA), P.L. No. 108-173, direct the Office 
of Inspector General (OIG) to undertake pricing studies that compare 
ASPs to widely available market prices and average manufacturer 
prices (AMP).  If the ASP for a drug exceeds the  widely available 
market price by a certain threshold (currently 5 percent), the 
Secretary of the Department of Health and Human Services (the 
Secretary) may disregard the ASP for the drug when setting 
reimbursement, pursuant to section 1847A(d)(3) of the Act.  Section 
1847A(d)(3)(C) of the Act goes on to state that  . . . the Inspector 
General shall inform the Secretary (at such times as the Secretary 
may specify to carry out  this subparagraph) and the Secretary shall, 
effective as  of the next quarter, substitute for the amount of  payment 
. . . the lesser of (i) widely available market price . . . (if any); or   
(ii) 103 percent of the AMP. . . .1    
Section 1847A(d)(5)(A) of the Act defines widely available market price 
to be the price that a prudent physician or supplier would pay for the  
drug, net of any routinely available price concessions.  In determining  
widely available market prices, OIG is authorized to consider 
information from sources including (but not limited to) manufacturers, 
wholesalers, distributors, physicians, and suppliers.2    
Medicare Part B Coverage of Inhalation Drugs 
Medicare Part B currently covers only a limited number of outpatient 
prescription drugs, including drugs used in conjunction with durable 
medical equipment (DME); injectable drugs administered by a 
physician; certain self-administered  drugs, such as oral anticancer 
 
1 Section 1927(k)(1) of the Act defines AMP as the average price paid to the manufacturer 
by  wholesalers in the United States for drugs distributed to the retail pharmacy class of  
trade. Pursuant to section 6001(c)(1) of the Deficit Reduction Act of 2005, the AMP will be 
determined without regard to customary prompt pay discounts beginning January 1, 2007.   
2 Section 1847A(d)(5)(B) of the Act.   
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I N T R O D U C T I O N   
drugs and immunosuppressive drugs; and some vaccines.3  Inhalation 
drugs used in conjunction with a nebulizer are covered by Medicare Part 
B under the DME provisions.4  These drugs treat and prevent symptoms 
brought on by lung diseases, such as asthma and chronic obstructive 
pulmonary disorder.  
Medicare Part B Payments for Inhalation Drugs 
Suppliers (e.g., home care companies, mail order pharmacies, and retail 
pharmacies) typically provide the inhalation drugs prescribed by 
physicians to Medicare beneficiaries.  Suppliers can purchase the drugs  
through several sources, including wholesalers, distributors, and 
manufacturers.    
To obtain Medicare payment for inhalation drugs, suppliers submit 
claims using codes established by the Centers for  Medicare &  Medicaid 
Services (CMS) as part of the Healthcare Common Procedure Coding 
System (HCPCS).5  The HCPCS codes provide a standardized coding 
system for describing the specific items and services provided in the 
delivery of health care.  In the case of prescription drugs, each HCPCS 
code defines the drug name and dosage size but does not specify 
manufacturer or package size information.6  
Medicare and its beneficiaries paid over $900 million for inhalation 
drugs in 2006, with five HCPCS codes representing 97 percent of 
Medicare expenditures for inhalation drugs. 7  8  The five  HCPCS codes 
for inhalation drugs with the highest Medicare expenditures in 2006 are 
listed in Table 1 on the following page. 
 
 
3 For the purpose of this report, the term Part B-covered drugs refers to outpatient 
prescription drugs covered by Medicare Part B.  Part B-covered drugs do not refer to drugs  
billed under Part A but paid  with Part B funds,  such as drugs administered in a dialysis  
setting.   
4 70 Fed. Reg. 10746, 10747 (Mar. 4, 2005). 
5 CMS contracts with private companies, known as carriers, to process and pay Medicare 
Part B claims, including those for inhalation drugs.   
6 Typically, HCPCS codes correspond to a single drug distributed by one or more 
manufacturers.  However, in some cases, HCPCS codes may represent several different 
drugs.  
7 Medicare and its beneficiaries paid over $11 billion for all Part B-covered prescription 
drugs in 2006.   
8 Medicare Part B Extract and Summary System (99 percent of claims reported). 
Accessed July 30, 2007.   
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I N T R O D U C T I O N
   
 
Table 1.  HCPCS Codes for Inhalation Drugs With the Highest Medicare 
Expenditures in 2006 
HCPCS                                                                      Short                                2006 
Code                                                           Description                      Expenditures 
J7614*  Levalbuterol inhalation solution (unit dose), 0.5 mg   $366,421,299 
J7620*  Albuterol, up to 2.5 mg, and ipratropium bromide,    $246,224,526 
up to 0.5 mg, noncompounded 
J7626*  Budesonide inhalation solution (unit dose),               $214,217,163 
up to 0.5 mg 
J7613**  Albuterol inhalation solution (unit dose), 1 mg  $41,358,006 
J7644**  Ipratropium bromide inhalation solution (unit dose),    $16,143,862 
1 mg 
* Levalbuterol, the combination of albuterol and ipratropium bromide, and budesonide are  single-source drugs 
that do not have generic versions and  are supplied by a single manufacturer.    
** Albuterol and ipratropium bromide are multiple-source drugs that have numerous generic versions and are 
supplied by multiple manufacturers.    
Source:  CMSs Part B Extract and Summary System data (99 percent  complete).  Accessed July 30, 2007.  
Medicare Part B Payment Methodology for Inhalation Drugs 
The MMA changed the basis of payment for most Part B-covered drugs,  
including inhalation drugs, to ASP, effective January 1, 2005.  Prior to 
2005, Medicare generally paid for these drugs based on the average 
wholesale price (AWP). 9   Numerous reports by OIG and the 
Government Accountability Office found that the AWP-based 
reimbursements were often significantly higher for Part B-covered 
drugs than the prices that drug manufacturers,  wholesalers, and  
similar entities actually charged the physicians and suppliers that 
purchase these drugs.  
Section 1847A(c) of the Act, as added by the MMA, defines ASP as a 
manufacturers sales of  a drug to all  purchasers  in the United States in 
a calendar quarter divided by the total number of units of the drug sold 
by the manufacturer in that same quarter.  The ASP includes all sales 
 
9 In 2004, the reimbursement amount for most covered drugs was based on either           
80 percent or 85 percent of the AWP as published in national pricing compendia, such as 
the Red Book. Prior to 2004, Medicare Part B reimbursed for covered drugs based on the 
lower of either the billed amount or 95 percent of the AWP. 
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(e.g., sales to pharmacies that are reimbursed by Medicaid or private 
insurance plans), not just sales reimbursed by Medicare Part B.  The 
ASP is net of any price concessions,  such as volume, prompt pay, and 
cash discounts; free goods contingent on purchase requirements; 
chargebacks; and rebates other than those obtained through the 
Medicaid drug rebate program.10  Sales that are nominal in amount are 
exempted from the ASP calculation, as are sales excluded from the  
determination of best price in the Medicaid drug rebate program.11  12  
Manufacturers report ASPs by national drug code (NDC), which is an 
11-digit identifier that indicates the drug name, the manufacturer of the 
drug, the product dosage form, and the package  size.  Manufacturers 
must provide CMS with the ASP and volume  of sales for each NDC on a 
quarterly basis, with submissions due 30 days after the close of the 
quarter.13    
Because Medicare payment for Part B-covered drugs is based on 
HCPCS codes rather than NDCs, and more than one NDC may meet the 
definition of a particular HCPCS code, CMS has developed a file that 
crosswalks manufacturers NDCs to HCPCS codes. CMS uses 
information in the crosswalk to calculate volume-weighted ASPs for 
covered HCPCS codes.    
There is a two-quarter lag between  the time when sales reflected in the 
ASP occur and the time  when these sales become the basis for Medicare 
payment amounts.  For example, fourth-quarter 2006 ASP submissions 
from manufacturers served as the basis for second-quarter 2007 
Medicare payment for most Part B-covered drug codes.  As of       
January 1, 2005, Medicare payment amounts for most Part B-covered 
prescription drugs are equal to 106 percent of the volume-weighted 
ASPs for the HCPCS codes.  Medicare beneficiaries are responsible for 
20 percent of this amount in the form of coinsurance. 
 
 
 
10 Section 1847A(c)(3) of the Act. 
11 Pursuant to section 1927(c)(1)(C)(i) of the Act,  best price is the lowest price available 
from the manufacturer during the rebate period to any  wholesaler, retailer, provider, health  
maintenance organization, nonprofit entity, or  governmental entity  within the United 
States, with certain exceptions. 
12 Section 1847A(c)(2) of the Act. 
13 Section 1927(b)(3) of the Act.   
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I N T R O D U C T I O N   
 
Changes to Medicare Payment for Inhalation Drugs 
The way Medicare pays for two inhalation drugs (albuterol and 
levalbuterol) has undergone several changes since 2003.   
 	  In 2003, albuterol and levalbuterol  were included in the same 
HCPCS code (J7619) and had the same Medicare payment amount.14    
 	  Effective January 1, 2005, CMS created separate HCPCS codes and 
Medicare payment amounts for both albuterol (J7613) and 
levalbuterol (J7614).   
 	  However, as reflected in a May 2007 coding announcement, CMS 
reestablished a single HCPCS code (Q4094) for albuterol and 
levalbuterol effective July 1, 2007.15  Payment for the new code was 
based on a combination of the ASPs for both drugs.16    
 	  A provision in the Medicare, Medicaid, and SCHIP Extension Act of 
2007 (Extension Act) provides flexibility in payment determinations 
designed to yield the lowest payment amount for certain drugs 
including those studied for this report.  After we completed our 
analysis, but before we issued a draft report, CMS once again 
established separate HCPCS codes and payment amounts for 
albuterol (J7613) and levalbuterol (J7614), as required by the 
Extension Act, effective April 1, 2008.17  18   
For a more detailed discussion of recent changes to Medicare payment 
for albuterol and levalbuterol, please refer to Appendix A. 
 
 
14 For the purpose of this review, albuterol and levalbuterol refer to the unit-dose forms 
of these drugs; this review  does not include the concentrated forms.  Levalbuterol is 
produced by one manufacturer (Sepracor) under the brand name of Xopenex, has its own  
patent, and contains only a therapeutically active single isomer (molecule).  Albuterol is a 
two-isomer (molecule) inhalation drug with numerous generic versions and is supplied by  
multiple manufacturers.  According to the Food and  Drug  Administration, levalbuterol and  
albuterol are not therapeutically equivalent. 
15  CMS Coding Announcement.  Available online at 
http://www.cms.hhs.gov/MedHCPCSGenInfo/Downloads/051807_coding_announcement.pdf. 
Accessed on May 22, 2007. 
16 For the third quarter of 2007, the Medicare payment amount increased nearly         
650 percent for albuterol (from $0.081 per milligram to $0.525 per milligram) and decreased 
by 66 percent for levalbuterol (from $1.535 per half milligram to $0.525 per half-milligram). 
17 Section 112(b)(2) of the Extension Act. 
18 For the second quarter of 2008, the Medicare payment amount for albuterol is      
$0.044 per milligram and for levalbuterol is $0.280 per half milligram.   
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II NN TT RR OO DD UU CC TT II OO NN    
Related Work by the Office of Inspector General 
A June 2006 report entitled A Comparison of Average Sales Prices to 
Widely Available Market Prices: Fourth Quarter 2005 
(OEI-03-05-00430) was the first OIG review to compare ASPs to widely 
available market prices. For that review, OIG compared second-quarter 
2005 volume-weighted ASPs (the basis of fourth-quarter 2005 Medicare 
payment amounts) to fourth-quarter 2005 widely available market 
prices for nine HCPCS codes identified by a previous OIG study for 
which ASPs exceeded widely available market prices by at least          
5 percent.19 OIG found that for five of nine HCPCS codes under review, 
the volume-weighted ASPs exceeded widely available market prices by 
the 5-percent threshold specified in section 1847A(d)(3) of the Act. As 
estimated in OIGs report, lowering the payment amount for these five  
codes to widely available market prices would have reduced Medicare  
expenditures by $67 million in 2006. 
In addition, OIG issued several reports that focused specifically on 
concerns about Medicare payment amounts for the inhalation drugs 
albuterol and ipratropium bromide prior to MMAs passage.20   For 
example, two January 2004 OIG reports found that in 2003 (when 
payment was based on AWP), the Medicare payment amounts for 
albuterol and ipratropium bromide were substantially higher than the 
amounts paid by other Government payers (i.e., the Department of  
Veterans Affairs, Medicaid) and prices paid by distributors.21  
METHODOLOGY 
Scope and Data Collection 
Scope. This review compared the volume-weighted ASPs to widely 
available market prices for the five inhalation drugs with the highest 
Medicare expenditures in 2006 (see Table 1 on page 3). We obtained the 
ASP data from CMS and widely available market price data from 
inhalation drug distributors.     
 
19 Adequacy of Medicare Part B Drug Reimbursement to Physician Practices for the 
Treatment of Cancer Patients (A-06-05-00024), September 2005. 
20 OIG issued several reports focusing on Medicare payment for inhalation drugs: 
OEI-03-01-00410, March 2002; OEI-03-03-00510, January 2004; OEI-03-01-00411, 
March 2002; OEI-03-03-00520, January 2004. 
21 OEI-03-03-00510, January 2004; OEI-03-03-00520, January 2004. 
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Widely Available Market Price Data.  In July 2007, we sent surveys to        
31 distributors identified by Sepracor (the manufacturer of levalbuterol) 
as having sold inhalation drugs during recent quarters.22  The surveys 
requested that the distributors provide total sales23 and sales volume for 
the second quarter of 2007 by NDC for the five inhalation drugs under 
review.   We also asked distributors to include any discounts and rebates 
that they offered to their customers.24   Between July and October 2007, 
24 of 31 distributors provided us with inhalation drug sales data.  Three 
additional distributors provided data after the collection deadline; we  
did not include these data in our analysis.  The remaining four 
distributors have not provided sales data for inhalation drugs as of    
May 2008.25      
CMS Data.   We obtained volume-weighted ASP data from CMS for the  
fourth quarter of 2006 (basis for second-quarter 2007 Medicare payment 
amounts) and first quarter of 2007 (basis for third-quarter 2007 
Medicare payment amounts). 
Data Analysis 
We excluded from our analysis any sales data submitted by distributors 
related to NDCs that were not associated with the five inhalation drugs 
included in this review.26   In addition, we excluded from this analysis 
any sales transactions in which both the sales volume and total amount  
paid (net discounts, where applicable) were negative.  Finally, we 
excluded data that did not include the dates of sale.  Two of the      
 
22 OIG obtained a list of distributors only from Sepracor because the scope of the 
inspection was limited to levalbuterol at the time of sample selection.  Because the list 
obtained from Sepracor included the largest national distributors of prescription drugs as 
well as numerous regional distributors, OIG believes that the distributors surveyed for this 
review are an accurate reflection of the inhalation drug  market.   
23 Most distributors provided total sales.  However, two distributors do not resell 
inhalation  drugs; they provide the drugs directly to pharmacies.  These two distributors 
provided data on their total purchases for inhalation drugs.  For the purpose of this 
analysis, data from these two distributors is considered sales data.   
24 Several distributors responded that they offered price discounts to their customers but 
were unable to provide any specific data on discounts.  We  were unable to include the 
discounts from these distributors in our calculation of widely available market prices.  
Therefore, the actual widely available market prices could be lower than the prices reported  
in the findings.   
25 We sent up to two follow-up surveys and made several attempts to contact               
nonresponding distributors by phone  when they did not submit pricing data. 
26 For example, albuterol is produced in both  inhalation solution and tablet forms.  The 
scope of this review is limited to albuterol inhalation solution, and therefore, we  excluded  
sales data related to national drug codes for albuterol tablets from this analysis.   
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I N T R O D U C T I O N   
twenty-four responding distributors did not provide the dates of sale for 
any of their sales data; therefore, we excluded all sales from these two 
distributors from our analysis.      
We aggregated the remaining NDCs  by their corresponding HCPCS 
codes.  To calculate the  widely available market price for each of the 
inhalation drugs, we summarized the total sales for the second quarter 
of 2007 to all customers (net of discounts, where available) and divided 
that number by the total number of  units sold during the same 
quarter.27  
Comparing ASPs to Widely Available Market Prices.   For each HCPCS code 
under review, we compared the volume-weighted ASPs from the fourth  
quarter of 2006 (basis for second-quarter 2007 Medicare payment 
amounts) to  the respective widely available market prices from the second  
quarter of 2007.  Consistent with the directive in the MMA, we calculated 
the percentage difference between the widely available market price and  
volume-weighted ASP for each inhalation drug HCPCS code and identified  
the codes that met or exceeded the 5-percent threshold defined by the 
MMA. 
Monetary Impact.  For HCPCS codes that met or surpassed the 5-percent 
threshold, we estimated what the monetary impact would have been in the 
second quarter of 2007 if Medicare based payment for these HCPCS codes 
on the widely available market prices found in this report.  We subtracted  
the second-quarter 2007 widely available market price from the        
second-quarter 2007 Medicare payment amount for the HCPCS code, 
which is equal to 106 percent of the volume-weighted ASP.  To estimate 
the financial impact for the second quarter of 2007, we multiplied the 
difference by one-fourth of the number of services allowed by Medicare for 
each HCPCS code in 2006, as reported in CMSs Part B Extract and 
Summary System.28  This estimate assumes that the number of services 
that were allowed by Medicare in 2006 remained consistent from one 
quarter to the next and that there were no significant changes in 
utilization between 2006 and 2007.   
 
27 The unit values are based on the volume-weighted ASP calculation for each drug.  
ASPs for albuterol/ipratropium bromide and budesonide are calculated on a per unit basis. 
ASPs for albuterol and ipratropium bromide are calculated per milligram.  The ASP for 
levalbuterol is calculated per 0.5 milligram. 
28 As of July 30, 2007, CMSs 2006 Medicare Part B Extract and Summary System was 
99-percent complete.   
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III NNN TTT RRR OOO DDD UUU CCC TTT III OOO NNN     
Impact of Inhalation Drug Coding Change.  We also analyzed the potential 
impact of recent coding and payment changes regarding albuterol and 
levalbuterol. We compared the second-quarter 2007 Medicare payment 
amounts for albuterol and levalbuterol to the third-quarter 2007 Medicare  
payment amount for the new HCPCS code (Q4094), which is based on 
ASPs of both drugs. We also compared the third-quarter 2007 Medicare 
payment amount to the widely available market price for albuterol and 
levalbuterol to determine the difference between Medicare payment and  
acquisition costs.    
Limitations 
We did not verify the accuracy of the sales data provided by the 
distributors. We were unable to include all distributor discounts and 
rebates in our calculation of widely available market price. Therefore,  
the actual widely available market price could be lower than the prices 
reported in the findings.   
After we completed our analysis, but before we issued a draft report, 
CMS once again established separate HCPCS codes and payment 
amounts for albuterol (J7613) and levalbuterol (J7614), as required by 
the Extension Act, effective April 1, 2008. 
Standards 
This study was conducted in accordance with the Quality Standards for 
Inspections issued by the Presidents Council on Integrity and 
Efficiency and the Executive Council on Integrity and Efficiency. 
OEI-03-07-00190           A  COMPARISON OF  ASPS TO  WIDELY  AVAILABLE  MARKET PRICES FOR INHALATION DRUGS   9   
   
  F I N D I N G S  
The volume-weighted average sales price for      Consistent with sections 
two of the five inhalation drugs under review   1847A(d)(1) and (2) of the Act, we 
compared ASPs and widely 
exceeded the widely available market price by at 
available market prices for five 
least 5 percent in the second quarter of 2007  
inhalation drugs to identify 
instances in which the volume-weighted ASP for a particular drug 
exceeded the widely available market price by at least 5 percent.  Two of 
the five HCPCS codes surpassed the 5-percent threshold in the second 
quarter of 2007:  albuterol (J7613) and levalbuterol (J7614).  As Table 2 
illustrates, the volume-weighted ASP for albuterol exceeded the widely 
available market price by 85 percent; the volume-weighted ASP for 
levalbuterol exceeded the widely available market price by 19 percent.29    
Table 2.  Inhalation Drugs for Which the Volume-Weighted  ASP Exceeded the Widely  Available Market Price     
by at Least 5 Percent in the Second Quarter of 2007 
HCPCS                                                             Short Description     Second-Quarter Fourth-Quarter  Percentage
Code           2007 Widely  2006 ASP**   Difference 
  Available Market
                    Price* 
J7613                     Albuterol inhalation solution (unit dose), 1 mg  $0.041  $0.076  85.4% 
J7614             Levalbuterol inhalation solution (unit dose), 0.5 mg  $1.218  $1.448  18.9% 
*Source:  OIG analysis of second-quarter 2007  widely  available market prices for inhalation drugs.   
**Source:  CMSs fourth-quarter 2006 ASP file. 
Note: All numbers in this table have been rounded.   
Medicare expenditures  would have been reduced by  $27 million in the  
second quarter of 2007 had payment amounts for albuterol and levalbuterol  
been based  on widely available market prices.  Section 1847A(d)(3)(A) of 
the Act states that the Secretary may disregard the ASP for the drug  
when setting reimbursement if OIG finds that the ASP for a drug 
exceeds the  widely available market price by a certain threshold  
(currently 5 percent).  Had Medicare payment amounts for albuterol 
and levalbuterol been based on widely available market prices in the 
second quarter of 2007, we estimate that Medicare expenditures for 
 
29 The actual widely available market prices for these HCPCS codes may be even lower 
than the  prices we calculated, as multiple respondents offered price discounts but did not 
provide any specific discount data that could  be factored into our analysis.     
 
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F I N D I N G S  
these drugs would have been reduced by $27 million ($6 million for 
albuterol and $21 million for levalbuterol).30    
 
As reflected in the May 2007 
Because of CMSs May 2007 coding change, the 
coding announcement, CMS 
Medicare payment amount for albuterol in the 
reestablished a single HCPCS 
third quarter of 2007 may have been 13 times 
code for albuterol and levalbuterol 
greater than its widely available market price  
and based  Medicare payment 
amounts for these drugs on the 
volume-weighted ASPs of both products effective July 1, 2007.  From the 
second to the third quarter of 2007, this coding change resulted in a               
650-percent increase in the Medicare payment amount for albuterol 
(from $0.081 to $0.525 per milligram).  Assuming that market prices 
were similar to those of the previous  quarter, this new payment amount 
for albuterol was 13 times greater than the widely available market 
price.  Furthermore, the Medicare payment amount for albuterol in the 
third quarter of 2007 was 12 percent higher than the AWP-based 
Medicare payment amount that was in effect prior to the 
implementation of the MMA.31    
In contrast,  the Medicare payment amount for levalbuterol decreased by 
66 percent between the second and third quarters of 2007 (from  
$1.535 per 0.5 milligram to $0.525 per 0.5 milligram).  This means that 
Medicare paid for levalbuterol at an amount 57 percent below the 
widely available market price in the third quarter of 2007 (again, 
assuming similar market prices).   
Table 3 on the following page presents the differences between the 
Medicare payment amount and widely available market price for  
albuterol and levalbuterol in the second and third quarters of 2007. 
 
 
 
30 If 103 percent of the AMP is lower than the widely available market price for these 
drugs, then Medicare expenditures would be reduced even further; however, a comparison 
of ASPs to AMPs is beyond the scope of this report.  OIG has produced several reports that 
have compared ASPs to AMPs. 
31 In 2003, prior to implementation of the payment reductions based on the MMA, 
Medicare payment for albuterol was $0.47 per milligram and was based on 95 percent of 
AWP. 
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F I N D I N G S  

 
Table 3.  Comparison of the Medicare Payment Amount and Widely  Available Market Price for Albuterol and  
Levalbuterol 
Drug  Second-Quarter 2007 Second-Quarter 2007       Third-Quarter 2007
    Widely  Available  Medicare Payment       Medicare Payment 
           Market Price*                   Amount **                     Amount*** 
Albuterol inhalation solution (unit dose), 1 mg 
$0.041  $0.081  $0.525 
Levalbuterol inhalation solution (unit dose), 0.5 mg  
$1.218  $1.535  $0.525 
*Source:  OIG analysis of second-quarter 2007  widely  available market prices for inhalation drugs.   
**Source:  CMSs second-quarter 2007 ASP file.   
***Source:  CMSs third-quarter  2007  ASP file.   
Note: In the  second quarter of 2007, albuterol (J7613) and levalbuterol (J7614) had separate HCPCS codes.  Effective July 1, 2007, CMS established    
a single HCPCS code (Q4094) for albuterol and levalbuterol.  
 
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  S U M M A R Y
 
OIG compared ASPs to widely available market prices to identify 
instances in which the volume-weighted ASPs for five inhalation drugs 
exceeded the widely available market price by a threshold of 5 percent.  
We identified two drugs (albuterol and levalbuterol) that exceeded the  
5-percent threshold in the second quarter of 2007.  However, CMS 
established a single HCPCS code and payment amount for albuterol and 
levalbuterol effective July 1, 2007.  As a result of this change, the 
Medicare payment amount for albuterol in the third quarter of 2007 
may have been 13 times  greater than the widely available market price 
in the previous quarter.  In contrast, the Medicare payment  amount for 
levalbuterol in the third quarter of 2007 was 57 percent below the 
widely available market price in the previous quarter. 
After we completed our analysis, but before we issued a draft report, 
CMS separated albuterol and levalbuterol back into two codes, thereby 
establishing separate payment amounts for the two drugs.  As of           
April 1, 2008, the new Medicare payment amount for albuterol is   
$0.044 per milligram, an amount very close to the widely available 
market price ($0.041) we calculated for the second quarter of 2007.  The 
new Medicare payment  amount for levalbuterol under the new 
calculation method required by the Extension Act is $0.280 per            
0.5 milligrams, which is substantially lower than the widely available 
market price of $1.218 from the second quarter of 2007.  In future 
studies, OIG will continue to monitor the utilization of and payment for 
inhalation drugs.     
AGENCY COMMENTS  
CMS states that the Extension Act not only established a special 
payment rule for certain inhalation drugs included in this study but 
also revised  the volume-weighting methodology for determining 
payments based on the ASP.32  As a result, CMS believes that there are 
limitations to this studys methodology and findings directly related to 
the calculation of the volume-weighted ASP.  Specifically, CMS notes 
 
32 For an extensive discussion of volume-weighting methodologies, see Calculation of  
Volume-Weighted Average Sales Price for Medicare Part B Prescription Drugs                     
(OEI-03-05-00310).  Section 112(a) of the Extension Act required CMS to calculate the  
volume-weighted ASP based on  the method recommended in that report. 
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S U M M A R Y  
that OIG used two different volume-weighting methodologies in its 
comparison; i.e., CMSs ASPs are based on the pre-Extension Act 
methodology while OIGs widely available market prices are based on 
the post-Extension Act  methodology.  CMS believes that the use of a  
single volume-weighting methodology would result in a significantly 
smaller difference between the ASP and the widely available market 
price.  
In addition, CMS states that based on recent statutory changes, (1) the 
current Medicare payment amount for albuterol is very close to the 
widely available market price identified by OIG and (2) the current  
Medicare payment amount for levalbuterol is significantly lower than  
in the past.  CMS then notes that levalbuterol is treated as a  
multiple-source drug pursuant to section 1847A(c)(6)(C)(ii) of the Act.  
As a result, CMS is concerned that OIGs comparison between the 
Medicare payment amount and the widely available market price for 
levalbuterol may not be  accurate.    
The full text of CMSs comments is provided in Appendix B. 
OFFICE OF INSPECTOR GENERAL RESPONSE 
Previous OIG work demonstrated the problems with CMSs 
methodology to calculate ASPs prior to the statutory changes of the  
Extension Act.  Unlike the methodology for determining the ASP, the 
methodology for determining the widely available market price is not 
explicitly defined in statute.  Rather, the statute indicates that OIGs 
determination of this price should reflect what a prudent physician or 
supplier would pay for a drug based on data collected from any number 
of specified sources taking into account price concessions.  In meeting 
this requirement, we calculated the widely available market price in a 
manner (total sales divided by total units sold) consistent with the ASP 
calculation as defined by the Extension Act, rather than CMSs now 
discontinued methodology.   
Furthermore, we understand that provisions of the Act require 
levalbuterol to be classified  as a multiple-source drug for payment 
purposes.  However, levalbuterol has its own patent and, according to 
the Food and Drug Administration, is not therapeutically equivalent to 
albuterol.  During the period in which we collected widely available 
market price data, CMS considered levalbuterol to be a single-source 
drug. CMSs May 2007 coding change affects Medicare payment.  
However, when suppliers purchase levalbuterol in the marketplace, 
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S U M M A R Y  
they do not pay a price that averages in the price of albuterol as well.  
The widely available market price that we calculated illustrates how the 
Medicare payment amount determined under the method  required by 
the Extension Act compares to the actual price of  the drug in the 
marketplace.   
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  A P P E N D I X ~ A
Changes to Medicare Payment Methodology for Albuterol and Levalbuterol 
The way Medicare pays for albuterol and levalbuterol has undergone 
several changes since 2003.  From January 2003 to December 2004, 
albuterol and levalbuterol were included in the same Healthcare 
Common Procedure Coding System (HCPCS) code (J7619).  Under this 
method, the  payment amount for albuterol and levalbuterol was the 
same and was based on the median average wholesale price (AWP).33   
Effective January 1, 2005, the Centers for Medicare & Medicaid 
Services (CMS) established separate HCPCS codes and separate  
payment amounts for albuterol (J7613) and levalbuterol (J7614).  The 
Medicare payment amount at this time was based on 106 percent of 
each drugs  average sales price (ASP).   
As described in a May 2007 coding announcement, CMS reestablished a 
single HCPCS code (Q4094) for albuterol and levalbuterol effective       
July 1, 2007.34  Thus, as of July 1, 2007, the Medicare payment amount for 
the code was based on a volume-weighted average of both albuterol and  
levalbuterol. According to the coding announcement, this change was 
made to ensure that payments reflected the grandfathering provision of 
section 1847A of the Social Security Act (the Act), which states: 
With respect to single source drugs or biologicals that are within   
the same billing and payment code as of October 1, 2003, the 
Secretary shall treat such single source drugs or biologicals as if 
the single source drugs or biologicals were multiple source drugs.35    
As a result, CMS established a single HCPCS code (Q4094) for both 
unit-dose albuterol and unit-dose levalbuterol, effective July 1, 2007.  
This coding change had a substantial impact on the Medicare payment 
amounts for albuterol and levalbuterol.  For the third quarter of 2007, 
the Medicare payment amounts increased nearly 650 percent for 
 
33 The Medicare payment amount  for albuterol and levalbuterol was based on                                            
95 percent of the AWP in 2003 and 80 percent of AWP in 2004.  
34 CMS Coding Announcement.  Available online at 
http://www.cms.hhs.gov/MedHCPCSGenInfo/Downloads/051807_coding_announcement.pdf. 
Accessed May 22, 2007. 
35 Section 1847A(c)(6)(C)(ii) of the Act.  CMSs change affected the Medicare payment for 
several other drugs as well.  We did not examine the potential impact on Medicare  
expenditures for any  drugs other than albuterol and levalbuterol.   
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A P P E N D I X ~ A     
albuterol and decreased by 66 percent for levalbuterol compared to 
amounts for the previous quarter.36    
The Medicare, Medicaid, and SCHIP Extension Act of 2007 
In December 2007, section 112(b)(2) of the Medicare, Medicaid, and 
SCHIP Extension Act of 2007 (Extension Act) established a special rule 
that addressed the application of the so-called grandfathering 
provision of the Act.37  This provision of the Extension Act will apply to 
certain drugs, including albuterol and levalbuterol. The provision 
establishes a lower of analysis that allows flexibility in Medicare 
payments for the affected drugs. More specifically, section 112(b)(2) of 
the Extension Act states: 
Beginning with April 1, 2008, the payment amount for each single 
source drug or biological . . . that is treated as a multiple source  
drug because of the application of subsection (c)(6)(C)(ii) is the 
lower of-
    (i) the payment amount that would be determined for such   
    drug or biological applying such subsection; or  
    (ii) the payment amount that would have been determined   
    for such drug or biological if such subsection were not   
    applied . . . 
[The payment amount for] a multiple source drug . . . (excluding a 
drug or biological that is treated  as a multiple source drug because 
of the application of such subsection) is the lower of- 
    (i) the payment amount that would be determined for such   
    drug or biological taking into account the application of  
    such subsection; or 
    (ii) the payment amount that would have been determined   
    for such drug or biological if such subsection were not   
    applied.38  
 
36 Medicare payment was $0.081 per milligram of albuterol (HCPCS code J7613) and 
$1.535 per half milligram of levalbuterol (HCPCS code J7614) in the second quarter of 2007.  
However, in the third quarter of 2007, the beginning of the new coding and payment 
methodology, Medicare payment for one milligram of albuterol and one half milligram of  
levalbuterol (HCPCS code Q4094) is $0.525.   
37 Section 1847A(c)(6)(C)(ii) of the Act. 
38 Section 112(b)(2)(7) of the Extension Act, codified at section 1847A(b)(7) of the Act. 
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A P P E N D I X ~ A  
For the purposes of albuterol and levalbuterol,  the new rule set forth in 
the Extension Act provided CMS the latitude to once again establish 
separate payment amounts for each drug.  Effective April 1, 2008, CMS 
implemented provisions of the Extension Act by establishing separate 
HCPCS codes and payment amounts for albuterol and levalbuterol.39    
 
39 For the second quarter of 2008, the Medicare payment amount for albuterol is $0.044 
per milligram and for levalbuterol is $0.280 per 0.5 milligrams.  
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 A P P E N D I X ~ B  
 
Agency Comments 
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A P P E N D I X ~ B  
 
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   A AC CK KN NO OW WL LE ED DG GM ME EN NT TS 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 David E. Tawes, Director, Prescription Drug Pricing 
Unit. 
Edward K. Burley served as the team leader for this study.  Other 
principal Office of Evaluation and Inspections staff from the  
Philadelphia regional office who contributed to the report include 
Roman Strakovsky; other central office staff who contributed include 
Linda B. Abbott. 
 
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