Department of Health and Human Services 
OFFICE OF 
INSPECTOR GENERAL 
EXCESSIVE MEDICARE 
REIMBURSEMENT FOR ALBUTEROL 
JANET REHNQUIST 
Inspector General 
MARCH  2002 
OEI-03-01-00410  O I G
FFICE OF  NSPECTOR  ENERAL

http://www.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 
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audits with its own audit resources or by overseeing audit work done by others.  Audits examine the 
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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, 
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The OIG's Office of Investigations (OI) conducts criminal, civil, and administrative investigations of 
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monetary penalties.  The OI also oversees State Medicaid fraud control units which investigate and 
prosecute fraud and patient abuse in the Medicaid program. 
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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 OIGs 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  
PURPOSE 
This report compares the amount Medicare reimburses for albuterol to the prices available to 
the Department of Veterans Affairs (VA) and to acquisition costs for suppliers. 
BACKGROUND 
Medicare 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 drug commonly used with a nebulizer 
to treat patients suffering from asthma or emphysema.  Medicare paid $296 million for 
albuterol in 2000. In general, Medicare reimburses a covered drug at 95 percent of the drugs 
average wholesale price.  Medicare payments include both the 80 percent that Medicare 
reimburses and the 20 percent coinsurance payment for which beneficiaries are responsible. 
Albuterol is usually provided to Medicare beneficiaries by suppliers, who then submit claims 
for reimbursement to Medicare. Suppliers can purchase drug products through group 
purchasing organizations, wholesalers, and directly from manufacturers. Unlike Medicare, the 
VA provides veterans with drugs purchased 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 compared Medicares current reimbursement amount for albuterol to amounts paid by the 
VA and to acquisition costs for suppliers and wholesalers. We obtained reimbursement 
amounts for albuterol from Medicare and acquisition costs from the VA. To obtain supplier 
and wholesaler acquisition costs, we collected prices from wholesale catalogs, supplier 
invoices, and Drug Topics Red Book. 
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i  FINDINGS 
Medicare and its beneficiaries would save $264 million a year if albuterol were 
reimbursed at the median price paid by the VA 
The Medicare reimbursement amount for albuterol is more than nine times greater than the VA 
price.  The VA purchases generic albuterol through the Federal Supply Schedule for a median 
price of only $0.05 per milligram (mg), while Medicare reimburses at 
$0.47 per mg.  We estimate that Medicare and its beneficiaries would save $264 million a 
year if reimbursement for albuterol were set at the median amount available to the VA. 
Medicare beneficiaries would receive $53 million of this savings through reduced coinsurance 
payments. Based on the Federal Supply Schedule, the VAs median acquisition cost for 
albuterol has fallen by more than 50 percent over the last three years, from $0.11 per mg in 
1998 to $0.05 per mg in 2001. During the same time period, Medicares reimbursement 
amount has remained constant at $0.47 per mg. 
Medicare and its beneficiaries would save between $226 million and $245 million 
a year if albuterol were reimbursed at prices available to suppliers 
Medicares reimbursement amount for albuterol was nearly six times higher than the median 
catalog price. Like the VA, catalog prices for albuterol have fallen over the last several years, 
from $0.23 per mg in 1996 to its current median price of $0.08 per mg. We found that 
Medicare would save $245 million a year by basing albuterol reimbursement on the current 
median catalog price. In addition, we found that the median supplier invoice price was $0.09 
per mg, and the median wholesale acquisition cost reported by manufacturers was $0.11 per 
mg.  If Medicare based albuterol reimbursement on these prices, the program and its 
beneficiaries would save between $226 million and $239 million a year. 
Less than one percent of albuterol suppliers were responsible for providing the 
majority of the product to Medicare beneficiaries in 2000 
Medicare reimbursed 6,522 suppliers for albuterol claims in 2000.  However, just 34 of these 
suppliers received more than $1 million each in Medicare reimbursement for albuterol in 2000, 
with five having between $11 million and $35 million in paid claims.  These 34 suppliers, who 
all provided home-delivery/mail-order services to beneficiaries, received 63 percent of the 
Medicare payments for albuterol in 2000.  Therefore, the majority of the albuterol supplied to 
Medicare beneficiaries was provided by suppliers that purchase a large quantity of the 
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ii  product.  We believe that suppliers that purchase albuterol in such large quantities may receive 
volume discounts from manufacturers and wholesalers. 
RECOMMENDATION 
Medicare should reduce excessive reimbursement amounts for albuterol 
Despite numerous attempts by the Centers for Medicare & Medicaid Services (CMS) to 
lower reimbursement amounts for prescription drugs, the findings of this report illustrate that 
Medicare still pays too much for albuterol. We have consistently found that the published 
average wholesale prices currently used by Medicare to establish reimbursement amounts bear 
little or no resemblance to actual wholesale prices that are available to suppliers and large 
government purchasers. 
We understand that unlike most drugs covered by Medicare, albuterol is usually provided by 
suppliers rather than administered by physicians. These suppliers obviously need to make a 
profit from the products they provide, yet the spread between what Medicare reimburses for 
albuterol and the price at which suppliers are able to purchase the drug is significant. 
Reimbursement levels for albuterol not only impact the Medicare program, but also affect 
Medicare beneficiaries who pay increased coinsurance amounts. 
We offer the following options for reducing excessive reimbursement amounts for covered 
drugs: 
<  Authorizing a commission to set payment rates. 
<	 Calculating national estimated acquisition costs based upon the average manufacturer 
prices reported to the Medicaid program. 
<	 Collecting more accurate average wholesale prices from drug pricing catalogs or other 
sources. 
<  Increasing the discount off the published average wholesale prices. 
<  Basing payment on physician/supplier acquisition costs. 
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iii  <  Establishing manufacturers rebates similar to those used in the Medicaid program. 
<  Creating a fee schedule for covered drugs based on the Federal Supply Schedule. 
<  Using CMS inherent reasonableness authority. 
<  Using competitive bidding. 
Agency Comments 
The CMS agreed that the amounts being reimbursed for drugs in the Medicare program are 
excessive, and that it is clear that the payment system for outpatient drugs needs revision.  The 
agency noted that it must find a way to ensure that the program pays appropriately for all 
Medicare benefits, including covered drugs and the services required to furnish those drugs. 
The CMS went on to state that they are looking forward to working with the Congress and the 
OIG to revise the Medicare payment system for prescription drugs. 
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iv  T A B L E   O F   C O N T E N T S  
PAGE

EXECUTIVE SUMMARY ..................................................... I

INTRODUCTION ............................................................ 1

FINDINGS 
Department of Veterans Affairs Costs......................................... 6

Supplier Acquisition Costs  ................................................. 7

Suppliers Reimbursed by Medicare  .......................................... 8

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

APPENDICES

A. Selected OIG Reports on Drug Reimbursement .............................. 11

B. Calculation of Potential Savings for Albuterol ................................ 12

C. Centers for Medicare & Medicaid Services Comments  ........................ 13

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v  I N T R O D U C T I O N  
PURPOSE 
This report compares the amount Medicare reimburses for albuterol to the prices available to 
the Department of Veterans Affairs (VA) and to acquisition costs for suppliers. 
BACKGROUND 
Medicare Coverage of Albuterol 
Medicare 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 drug commonly used with a nebulizer 
to treat patients suffering from asthma or emphysema. Albuterol is usually provided to 
beneficiaries by suppliers, who then submit claims for reimbursement to Medicare. Medicare 
paid $296 million for the unit dose form of albuterol in 2000. This total represents over 43 
percent of the $683 million Medicare paid for all inhalation drugs that year. Medicare 
payments include both the 80 percent that Medicare reimburses and the 20 percent 
coinsurance payment for which beneficiaries are responsible. 
Medicare Drug Reimbursement 
The Centers for Medicare & Medicaid Services (CMS), which administers the Medicare 
program, contracts with four durable medical equipment regional carriers to process all claims 
for durable medical equipment and associated supplies, including inhalation drugs. Each 
carrier is responsible for determining the reimbursement amount for inhalation drugs in their 
respective region based on Medicares reimbursement methodology. 
Medicares current reimbursement methodology for prescription drugs is defined by Section 
4556 of the Balanced Budget Act of 1997.  The carriers base their reimbursement amount for 
a covered drug on its average wholesale price as published in Drug Topics Red Book or 
similar pricing publications used by the pharmaceutical industry.  If a drug is available only as a 
single brand-name product, reimbursement is calculated by taking 95 percent of the drugs 
average wholesale price. For drugs like albuterol that have both brand and generic sources 
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1
 available, reimbursement is based on 95 percent of the median average wholesale price for 
generic sources. However, if a brand-name products average wholesale price is lower than 
the median generic price, Medicare reimburses 95 percent of the lowest brand price. 
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2  Recent Attempts to Lower Medicare Drug Reimbursement 
Section 4316 of the Balanced Budget Act of 1997 allows the Department of Health and 
Human Services to diverge from Medicares statutorily defined payment method if the method 
results in payment amounts which are not inherently reasonable. In late 1998, CMS regional 
carriers 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 reimbursement amounts were never implemented as Congress 
suspended the use of inherent reasonableness through a provision of the Medicare, Medicaid, 
and SCHIP Balanced Budget Refinement Act of 1999. This provision required (1) the 
General Accounting Office (GAO) to complete a study on the potential effects of using 
inherent reasonableness measures, and (2) the Department of Health and Human Services to 
publish new inherent reasonableness regulations based on the findings of the GAO report.  The 
GAO report, issued in July 2000, found that inherent reasonableness reductions for some 
items were justified; however, the GAO questioned the methodology the carriers used in their 
collection of pricing data for albuterol.  The Department has not issued any new inherent 
reasonableness regulations since the publication of the GAO report. 
The CMS has also included albuterol and several other inhalation drugs in a competitive 
bidding project in the San Antonio, Texas area that uses market forces to set accurate prices 
for durable medical equipment and related supplies.  In November 2000, CMS announced the 
selection of suppliers who had submitted competitive bids for the included items. New prices 
for these items went into effect on February 1, 2001. The new reimbursement amount for 
albuterol set by the competitive bidding process is approximately 32 percent below the usual 
Medicare price. The CMS hopes to use the results from these demonstrations more generally 
in the Medicare program. 
On May 31, 2000, CMS announced plans for Medicare to utilize newly available average 
wholesale prices for approximately 50 drugs, including albuterol. The new prices were 
developed for Medicaid through investigations conducted by the Department of Justice and the 
National Association of Medicaid Fraud Control Units.  The revised pricing data was obtained 
from wholesale pricing catalogs and then provided to First DataBank, publisher of a pricing 
compendium used by the pharmaceutical industry. First DataBank agreed to use the new data 
when reporting average wholesale prices to the States.  However, the Medicare, Medicaid, 
and SCHIP Benefits Improvement and Protection Act of 2000, enacted by Congress in 
December 2000, placed a moratorium on any decreases in Medicare drug reimbursement 
amounts.  The Act required GAO to complete a comprehensive study addressing both the 
appropriateness of drug reimbursement amounts and the adequacy of current payments for 
related practice expenses. The Department of Health and Human Services must then revise 
CMS drug reimbursement methodology based on GAOs recommendations. 
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3
 The GAO issued the first of two reports addressing drug pricing issues on September 21, 
2001. This report found that physicians and suppliers can obtain covered drugs for 
substantially less than the Medicare reimbursement amount.  The GAO concluded that 
Medicare should revise its drug payment methodology to more closely reflect available market 
prices. The second report, released October 31, 2001, found that payments made to 
oncologists relative to their practice expenses are close to the average for all specialties, and 
that the payments are 8 percent higher under the physician fee schedule then under the 
previous method that reimbursed based on the charges physicians billed for services. 
However, the GAO also found that recent modifications to the physician fee schedule 
substantially lowered payments for certain services, including chemotherapy administration. 
The GAO recommended changes to improve Medicares physician payment system. 
Department of Veterans Affairs Drug Reimbursement 
Unlike Medicare, the Department of Veterans Affairs (VA) purchases drugs for its healthcare 
system directly from manufacturers or wholesalers.  There are several options available to the 
VA when purchasing drugs, with the most common being the Federal Supply Schedule. The 
Federal Supply Schedule provides agencies like the 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, contracts are awarded to companies to 
provide supplies over a given period of time at the Federal Supply Schedule price. However, 
the 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. 
Cost of Drugs for Suppliers 
Suppliers can purchase drug products through group purchasing organizations, wholesalers, 
and directly from manufacturers. Group purchasing organizations 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 who accepts the group purchasing organizations price. Wholesalers purchase 
large volumes of drugs from manufacturers and sell them directly to suppliers. 
Related Work by the Office of Inspector General 
The Office of Inspector General (OIG) has studied a number of issues relating to Medicare 
drug reimbursement. Brief summaries of selected studies are presented in Appendix A. 
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4
 METHODOLOGY 
Medicare Reimbursement 
Medicare classifies drugs using codes in the Healthcare Common Procedure Coding System. 
These codes, commonly referred to as procedure codes, define the type of drug and, in most 
cases, a dosage amount. There are currently two procedure codes for albuterol, one for a unit 
dose solution and another for a concentrated solution. Because nearly all of the billing for 
albuterol is for the unit dose form of the drug, we only reviewed the reimbursement amounts 
for the unit dose code.  The term unit dose refers to a 3 milliliter (ml) solution of 0.083 
percent albuterol. The procedure code for the unit dose form of albuterol is J7619.  This code 
is defined as, albuterol, all formulations including separated isomers, inhalation solution 
administered through durable medical equipment, unit dose form, per 1 milligram (mg).  We 
obtained current fee schedule reimbursement amounts for procedure code J7619 from the four 
durable medical equipment regional carriers.  The reimbursement amount for albuterol was the 
same for each of the four carriers. 
We accessed CMS National Claims History File to determine Medicares total payments for 
albuterol and other inhalation drugs in 2000. We also used this file to analyze albuterol 
supplier data for the year 2000. 
Matching Procedure Codes to National Drug Codes 
The VA and suppliers use national drug codes rather than procedure codes to identify drug 
products.  Because of these coding differences, we used the April 2001 CD-ROM edition of 
Drug Topics Red Book to identify the specific national drug codes that match the procedure 
code definition for albuterol.  Each drug manufactured or distributed in the United States has a 
unique national drug code.  National drug codes identify the manufacturer of the drug, the 
product dosage form, and the package size.  Because Medicare uses only generic versions of 
albuterol to determine its reimbursement amount, we only selected generic albuterol national 
drug codes.  We found 19 national drug codes for generic albuterol that matched the 
procedure code definition of J7619. 
The procedure code for the unit dose form of albuterol is reimbursed per mg.  However, VA 
prices and wholesale prices were all based on 3 ml vials of 0.083 percent albuterol solution. 
Consequently, we needed to convert ml prices of albuterol into mg prices. A  3 ml vial of 
0.083 percent albuterol solution contains 2.5 mg of albuterol.  Therefore, 1 ml of solution 
contains 0.833 mg of albuterol (2.5 divided by 3). For each national drug code, we multiplied 
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5
 the number of milliliters of albuterol solution by 0.833 to determine the milligram amount, e.g., 
75 ml of solution multiplied by 0.833 equals 62.5 mg.  We then divided the drug price by the 
number of milligrams to determine a per mg price. 
Department of Veterans Affairs Prices 
To determine the VAs current costs for albuterol, we obtained a file from the VA website 
containing their 2001 contracted prices. The VA pricing file contained Federal Supply 
Schedule prices for 11 of the 19 matching albuterol national drug codes. To determine a 
single VA price, we calculated the median price per mg for these 11 codes. 
We also compared the 2001 VA prices to VA prices in the years 1998 through 2000.  We 
determined the percentage change each year in VA prices, and multiplied this number by the 
amount Medicare paid in a given year.  These figures represent the amount Medicare total 
payments would have increased or decreased if the Medicare reimbursement amount changed 
at the same rate as the VA price.  In order to estimate this figure for 2001, we assumed that 
2001 Medicare payments for albuterol would equal 2000 payments. 
Prices Available to Suppliers and Wholesalers 
To determine actual wholesale prices for albuterol, we reviewed year 2001 print and online 
catalogs from four drug wholesalers and two group purchasing organizations. The six pricing 
sources we used provide drug products to suppliers and physician practices. We then 
computed a single catalog price for albuterol by calculating the median price per mg of the 
corresponding national drug codes. 
In addition to catalog prices, we also used actual albuterol invoices to determine supplier 
acquisition costs. The invoices were collected by the OIG during a review of inhalation drug 
utilization.  The invoices were obtained during site visits to suppliers throughout the country, 
and were for albuterol purchased between June 1998 and August 2000. To determine a 
single invoice price, we calculated the median price per mg for the 91 invoice prices collected 
from suppliers. 
We also obtained manufacturer-reported wholesale acquisition costs from the April 2001 CD-
ROM edition of Drug Topics Red Book. The Drug Topics Red Book defines wholesale 
acquisition cost 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. Eleven of the 19 albuterol national drug codes had wholesale acquisition costs 
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6
 reported in 2001. From these costs, we calculated a median per mg wholesale acquisition 
cost for albuterol. 
Calculating Potential Medicare Savings 
To calculate potential Medicare savings, we compared Medicares reimbursement amount for 
1 mg of albuterol to VA prices, wholesale acquisition costs, catalog prices, and invoice prices. 
We determined the percentage difference in prices by subtracting the median source price 
from the Medicare price, and then dividing this number by the Medicare price. These 
percentages indicate how much Medicare would save if reimbursement for albuterol were 
based on prices provided by other sources. We then multiplied these percentages by the total 
amount Medicare paid for albuterol in 2000 to calculate dollar savings.  A table showing the 
data used to calculate potential savings is presented in Appendix B. 
_____________ 
This inspection was conducted in accordance with the Quality Standards for Inspections 
issued by the Presidents Council on Integrity and Efficiency. 
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7
 F I N D I N G S  
Medicare and its beneficiaries would save $264 million a year 
if albuterol were reimbursed at the price paid by the VA 
The Medicare reimbursement amount for albuterol is over nine times greater than 
the median VA price 
The median Federal Supply Schedule price available to the VA for generic albuterol is only 
$0.05 per mg, compared to $0.47 per mg for Medicare. We estimate that Medicare and its 
beneficiaries would save $264 million a year if reimbursement for albuterol were set at the 
median amount paid by the VA under the Federal Supply Schedule. The savings represent 89 
percent of the $296 million Medicare paid for albuterol in 2000. 
Medicare beneficiaries would receive $53 million of the $264 million in savings through 
reduced coinsurance payments. A Medicare beneficiary using a typical monthly amount of 
albuterol (250 mg) would pay $23.50 in Medicare coinsurance. That coinsurance amount is 
nearly double what the VA would pay outright ($12.50) to purchase one months supply of 
the drug. Table 1 below compares the Medicare reimbursement amount to median prices 
available through other sources.  It also provides Medicare savings and beneficiary 
coinsurance based on various reimbursement levels. 
TABLE 1: COMPARISON OF ALBUTEROL PRICES 
Monthly Medicare  Potential Annual 
Median  Cost of Typical  Beneficiary  Medicare and 
Price  Individual Monthly  Coinsurance Based  Beneficiary 
Pricing Source  per mg  Usage (250 mg)  on Source Price  Savings 
Medicare  $0.47  $117.50  $23.50  N/A 
Department of Veterans Affairs  $0.05  $12.50  $2.50  $264,222,803 
Wholesale Catalogs  $0.08  $20.00  $4.00  $245,349,746 
Supplier Invoices  $0.09  $22.50  $4.50  $239,058,727 
Wholesale Acquisition Cost  $0.11  $27.50  $5.50  $226,476,689 
Sources: 2001 Medicare Carrier and Department of Veterans Affairs Websites, 2001 Wholesale Catalogs, 1998-2000 Supplier 
Invoices Collected by OIG, 2001 Drug Topics Red Book 
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8
 Between 1998 and 2001, the median VA cost for albuterol decreased by over 50 
percent, while the Medicare reimbursement amount remained the same 
The VA price for albuterol has fallen by more than 50 percent over the last three years, from 
$0.11 per mg in 1998 to $0.05 per mg in 2001. During the same time period, Medicares 
reimbursement amount (based on reported average wholesale prices) has remained constant at 
$0.47 per mg. If the Medicare reimbursement amount for albuterol decreased at a rate equal 
to the VAs purchase price, Medicare and its beneficiaries would have saved $68 million in 
1999 and $108 million in 2000.  The program could save another $161 million in 2001.  The 
graph below illustrates the changes in VA and Medicare pricing over the last 3 years. 
GRAPH 1: COMPARISON OF ALBUTEROL PRICES, 1998-2001 
$0.50 
$0.45  $0.47  $0.47  $0.47  $0.47 
$0.40 
$0.35 
$0.30 
g 
m
r 
pe $0.25 
e  Medicare 
c
ri
P
$0.20  VA Median 
$0.15 
$0.10 
$0.11 
$0.08 
$0.05  $0.07 
$0.05 
$0.00 
1998  1999  2000  2001 
Year 
Sources: Medicare Carrier and Department of Veterans Affairs Websites 
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9
 Medicare and its beneficiaries would save between 
$226 million and $245 million a year if albuterol were 
reimbursed at prices available to wholesalers and suppliers 
Medicare payments for albuterol would be reduced by 83 percent if 
reimbursement amounts were based on prices listed in wholesale catalogs 
Medicare and its beneficiaries would save $245 million a year if the reimbursement amount for 
albuterol equaled the median price available to suppliers through wholesalers and group 
purchasing organizations. This represents 83 percent of the $296 million Medicare and its 
beneficiaries reimbursed for the drug in 2000. Catalog prices for generic albuterol ranged 
from a low of $0.07 per mg to a high of $0.15 per mg.  The Medicare reimbursement amount 
($0.47 per mg) was nearly six times more than the median catalog price ($.08 per mg). 
Like VA prices, catalog prices for albuterol have gone down over the last several years. In 
earlier reports, we found that the average catalog price for albuterol was $0.23 per mg in 
1996, and $0.13 per mg in 2000. The current catalog price of $0.08 per mg of albuterol is 65 
percent less than the catalog price of the drug five years earlier. 
Medicare payments for albuterol would be reduced by 81 percent if 
reimbursement amounts were based on supplier invoice prices 
Invoices reviewed by the OIG listed prices ranging from $0.08 to $0.14 per mg for albuterol 
purchased by suppliers between 1998 and 2000. The median price for albuterol purchased 
by these suppliers was $0.09 per mg, 81 percent less than the Medicare reimbursement 
amount. Medicare and its beneficiaries would save $239 million a year if albuterol were 
reimbursed at the median invoice price. 
Medicare payments for albuterol would be reduced by 77 percent if 
reimbursement amounts were based on manufacturer-reported wholesale 
acquisition costs 
Published wholesale acquisition costs for albuterol ranged from $0.09 to $0.18 per mg in April 
2001. The median wholesale acquisition cost was $0.11 per mg.  Individual drug 
manufacturers reported these wholesale acquisition costs to Drug Topics Red Book. The 
Drug Topics Red Book defines wholesale acquisition cost as manufacturer-quoted list prices 
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 to wholesale distributors, not reflective of bids, rebates, volume purchase agreements, or other 
types of exclusive contracts. 
If Medicare based its reimbursement for albuterol on manufacturer-reported wholesale acquisition 
costs rather than average wholesale prices, the program and its beneficiaries would save $226 million 
a year. 
Less than one percent of albuterol suppliers were 
responsible for providing the majority of the product to 
Medicare beneficiaries in 2000 
Medicare reimbursed 6,522 suppliers for albuterol claims in 2000.  However, just 34 of these 
suppliers received more than $1 million each in Medicare reimbursement for albuterol in 2000, 
with five having between $11 million and $35 million in paid claims.  These 34 suppliers, who 
all provided home-delivery/mail-order services to beneficiaries, received 63 percent of the 
Medicare payments for albuterol in 2000.  Therefore, the majority of the albuterol supplied to 
Medicare beneficiaries was provided by suppliers that purchase a large quantity of the 
product.  We believe that suppliers that purchase albuterol in such large quantities may receive 
volume discounts from manufacturers and wholesalers. 
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11
 R E C O M M E N D A T I O N  
Medicare should reduce excessive reimbursement amounts for albuterol 
Despite numerous attempts by the Centers for Medicare & Medicaid Services (CMS) to 
lower reimbursement amounts for prescription drugs, the findings of this report illustrate that 
Medicare still pays too much for albuterol. We have consistently found that the published 
average wholesale prices currently used by Medicare to establish reimbursement amounts bear 
little or no resemblance to actual wholesale prices that are available to suppliers and large 
government purchasers. 
We understand that unlike most drugs covered by Medicare, albuterol is usually provided by 
suppliers rather than administered by physicians. These suppliers obviously need to make a 
profit from the products they provide, yet the spread between what Medicare reimburses for 
albuterol and the price at which suppliers are able to purchase the drug is significant. 
Reimbursement levels for albuterol not only impact the Medicare program, but also affect 
Medicare beneficiaries who pay increased coinsurance amounts. 
We offer the following options for reducing excessive reimbursement amounts for covered 
drugs: 
<  Authorizing a commission to set payment rates. 
<	 Calculating national estimated acquisition costs based upon the average manufacturer 
prices reported to the Medicaid program. 
<	 Collecting more accurate average wholesale prices from drug pricing catalogs or other 
sources. 
<  Increasing the discount off the published average wholesale prices. 
<  Basing payment on physician/supplier acquisition costs. 
<  Establishing manufacturers rebates similar to those used in the Medicaid program. 
<  Creating a fee schedule for covered drugs based on the Federal Supply Schedule. 
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 <  Using CMS inherent reasonableness authority. 
<  Using competitive bidding. 
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13  Agency Comments 
The CMS agreed that the amounts being reimbursed for drugs in the Medicare program are 
excessive, and that it is clear that the payment system for outpatient drugs needs revision.  The 
agency noted that it must find a way to ensure that the program pays appropriately for all 
Medicare benefits, including covered drugs and the services required to furnish those drugs. 
The CMS went on to state that they are looking forward to working with the Congress and the 
OIG to revise the Medicare payment system for prescription drugs. The full text of CMS 
comments is presented in Appendix C. 
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 APPENDIX  A 
Selected OIG Reports on Drug Reimbursement

Medicare Reimbursement of Prescription Drugs (OEI-03-00-00310), January 2001. We found

that Medicare and its beneficiaries would save $1.6 billion a year if 24 drugs were reimbursed at

amounts available to the VA.  We also found that Medicare would save  $761 million a year by

paying the actual wholesale price for 24 drugs.

Medicare Reimbursement of Albuterol (OEI-03-00-00311), June 2000. We found that

Medicare and its beneficiaries would save $120 million or $209 million a year if albuterol was

reimbursed at amounts available through Medicaid and the VA, respectively.  Medicare and its

beneficiaries would save $47 million or $115 million a year if Medicare reimbursed albuterol at prices

available at chain and Internet pharmacies.

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. We also found that 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.

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 suppliers. Furthermore, we

found that there was no consistency among Medicare carriers in establishing and updating drug

reimbursement amounts. 

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.

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 APPENDIX  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. The Medicare program could have saved $94 million of the $182 million allowed for 
albuterol during the 14-month review period if Medicare reimbursement amounts had been based on 
average supplier invoice costs. 
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 APPENDIX 
B 
Calculation of Potential Savings for Albuterol

(1)	 To determine percentage differences in albuterol prices, we subtracted the source price from the 
Medicare price. We then divided this number by the Medicare price. 
(2)	 To calculate potential savings, we multiplied Medicares 2000 total payments ($295,677,899) 
for albuterol by the percentage difference in price. 
Potential 
Median  Medicare  Percentage  Medicare and 
Range of per  Price  Price  Difference  Beneficiary 
Price Source  mg Prices  per mg  per mg  in Price*  Savings 
Department of Veterans 
$0.05 to $0.10  $0.05  $0.47  89.4%  $264,222,803 
Affairs 
Wholesale Catalogs  $0.07 to $0.15  $0.08  $0.47  83.0%  $245,349,746 
Supplier Invoices  $0.08 to $0.14  $0.09  $0.47  80.9%  $239,058,727 
Wholesale Acquisition Cost  $0.09 to $0.18  $0.11  $0.47  76.6%  $226,476,689 
*Percentage rounded to the nearest tenth 
Excessive Medicare Reimbursement for Albuterol 
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 APPENDIX 
C 
Centers for Medicare & Medicaid Services Comments

Excessive Medicare Reimbursement for Albuterol 
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 APPENDIX 
C 
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