D EP.\RT \IE'\T O F H E.\LT I I .\:'\0 Hl"\1.\:'\ SER\"IC:ES 
OFFICE OF INSPECTOR GENERAL 
\\" \ SII I'\1; J'(l'\. I H  111~111 
TO: 	 Andrew M. Slavitt  APR 2 1 2015 
Acting Administrator 

Centers for Medicare & Medicaid Services 

FROM:  Suzanne MJ.1Cfu, 
Deputy fnspectoi .General 
for Evaluation and Inspections 
SUBJECT: 	 Recommendation Followup Memorandum Report:  Implementing OIG 
Recommendation Could Have Reduced Payments for DME Infusion Drugs by 
Hundreds ofMillions ofDollars, OEI-12-15-00110 
This memorandum report estimates (1) the amount by which Medicare expenditures for infusion 
drugs administered in conjunction with durable medical equipment (DME) could have been 
reduced ifthe Part B payment methodology had been revised as previously recommended by the 
Office of Inspector General (OIG), and (2) the difference between acquisition costs and 
Medicare payment amounts for DME infusion drugs. 
SUMMARY 
A February 2013 OIG report found that overall, Medicare payment amounts for DME infusion 
drugs substantially exceeded estimated acquisition costs, and that paying on the basis of average 
sales prices (ASPs) rather than average wholesale prices (A WPs) would have reduced Medicare 
expenditures by hundreds of millions of dollars between 2005 and 2011.  We recommended that 
the Centers for Medicare & Medicaid Services (CMS) either (1) seek a legislative change 
requiring DME infusion drugs to be paid using the ASP-based methodology or (2) include DME 
infusion drugs in the next round of the competitive bidding program.  CMS partially concurred 
with the first recommendation, but has not taken steps toward seeking legislation.  CMS 
concurred with the second recommendation but said subsequently that DME infusion drugs will 
not be included in competitive bidding until at least 2017. 
In updating our analysis, we found that Medicare expenditures for DME infusion drugs could 
have been reduced by $251 million in an 18-month period ifthe ASP-based payment 
methodology recommended by OIG had been implemented in April2013 (i.e., the quarter after 
our earlier report was issued).  Between the second quarter of2013 and the third quarter of2014,  Page 2  Andrew M. Slavitt 

 
at least 42 percent of DME infusion drugs had Medicare payment amounts that were more than 
twice their estimated acquisition costs.  In contrast, approximately one-quarter of these drugs had 
payment amounts that were below costs. 
 
BACKGROUND 
 
Medicare Part B Coverage of Infusion Pumps and Related Drugs 
In general, external and implantable pumps used in infusion therapy, as well as related drugs, are 
covered by Medicare under the DME benefit when they are used as specified by the Medicare 
National Coverage Determinations Manual.1  Infusion therapy is often provided in the home 
rather than in inpatient settings to reduce costs associated with inpatient care and to maintain 
patient convenience and comfort.2    
 
Medicare Part B Payments for DME Infusion Drugs 
Medicare payment amounts for most Part B-covered prescription drugs are equal to 106 percent 
of the volume-weighted ASPs for the drugs.3, 4  However, DME infusion drugs are not paid on 
the basis of ASPs.  Rather, payment amounts for these drugs are set at 95 percent of the AWPs 
that were in effect on October 1, 2003.5  Statutes and regulations do not define AWP, and AWPs 
do not represent actual transactional prices.  Rather, AWPs are the list prices established by drug 
manufacturers and reported by publishers such as Red Book.  Prior OIG work found that AWP 
was a fundamentally flawed basis for reimbursing for drugs under Medicare Part B.  Medicare 
beneficiaries are responsible for 20 percent of the payment amount in coinsurance, as well as for 
any deductible, regardless of whether payment is based on ASPs or AWPs.6  
 
                                                 
1 Medicare National Coverage Determinations Manual, Pub. No. 100-03,  ch. 1  280.14.  
2 National  Home Infusion Association (NHIA),  Infusion FAQs. Accessed at http://www.nhia.org/faqs.cfm on 
July 18, 2012. 
3 Section 1847A(c)  of the Social Security Act (the Act) defines ASP as a manufacturers sales of a  drug (with certain  
exceptions) 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 is  net  of any  price concessions, such  as volume 
discounts, prompt pay discounts, cash discounts, free goods contingent  on purchase requirements, chargebacks, 
and rebates other  than those obtained through the Medicaid drug  rebate program.   
4 In general, Part  B  drugs are classified using Healthcare  Common Procedure Coding  System  codes.   
5 Section 1842(o)(1)(D)(i) of the Act. According  to section  20.1.3 of chapter  17  of  the Medicare Claims  Processing  
Manual, Pub.  No.  100-04, this methodology does not  apply  if the drug is compounded or  furnished incident  to  
a professional  service.  For  DME infusion drugs not listed in compendia as of October  1, 2003, payments are set  at  
95 percent of their first  published  AWPs. Also, pursuant to  section 1842(o)(1)(D)(ii) of the Act, payments for DME 
infusion  drugs are not  based  on 95 percent of  AWP if subject to competitive bidding.   
6 Part B claims dated on  or after April 1, 2013, incur a 2-percent reduction in payment in accordance with the  
Budget Control Act of  2011 and the American Taxpayer Relief Act  of 2012 (i.e., sequestration).  This  mandatory 
payment reduction  is applied  after the  beneficiarys coinsurance has been determined, resulting in a payment rate for 
most Part  B  drugs of 104.3  percent  of the volume-weighted ASP.  For further explanation, see CMS, Mandatory 
Payment  Reductions in the  Medicare Fee-for-Service (FFS) ProgramSequestration,  CMS Medicare FFS  
Provider e-News, March  8, 2013.  Accessed at http://www.cms.gov/outreach-and-education/outreach/  
ffsprovpartprog/downloads/2013-03-08-standalone.pdf on  April 10, 2015. 
Implementing OIG Recommendation Could Have Reduced Payments for DME Infusion Drugs by  
Hundreds of Millions of Dollars (OEI-12-15-00110)   Page 3  Andrew M. Slavitt 
 
Each quarter, CMS publishes on its Web site an ASP payment limit file that includes both 
ASP- and AWP-based payment amounts for most DME infusion drugs.7  However, CMS 
reported to OIG in September 2014 that the agency is not currently updating its list of DME 
infusion drugs, meaning that new infusion drugs do not have an AWP-based payment amount 
listed on CMSs payment limit files.  The four Medicare Administrative Contractors (MACs) that 
process DME claims also publish lists of drugs (including DME infusion drugs) and payment 
amounts each quarter.  Because payment amounts for DME infusion drugs are set using AWPs 
from 2003, they do not change from  quarter to quarter.  However, the actual number of drugs 
classified as DME infusion drugs may change each quarter and this number differs among the 
DME MACs. 
 
From the second quarter of 2013 through the third quarter of 2014, Medicare Part B and its 
beneficiaries  spent $712 million for 31 DME infusion drugs.8 Expenditures for just six drugs 
accounted for 97 percent of this total. 
 
Competitive Bidding for DME Infusion Drugs 
The DME, Prosthetics, Orthotics, and Supplies (DMEPOS) Competitive Bidding Program was 
mandated by section 302 of the Medicare Prescription Drug, Improvement, and Modernization 
Act of 2003 to reduce expenses for Medicare and its beneficiaries.9  DME suppliers submit bids 
to become Medicare contract suppliers and to furnish items in competitive bidding areas.  
Payment amounts resulting from  the bids replace the fee-schedule payment amounts.10   
Competitive bidding has been implemented in phases, beginning with bids for items with the 
highest cost and highest volume or for those with the largest savings potential.11  At this time, 
DME infusion drugs have not been included as part of the competitive bidding process.   
 
Previous OIG Report on DME Infusion Drugs 
In February 2013, OIG released a report entitled Part B Payments for Drugs Infused Through 
Durable Medical Equipment (OEI-12-12-00310).  We found that Part B payment amounts for 
DME infusion drugs listed on CMSs payment limit files exceeded estimated acquisition costs by 
54 to 122 percent annually, and that Medicare spending on DME infusion drugs would have been 
reduced by $334 million between 2005 and 2011 had payments been based on ASPs rather than 
AWPs.  Furthermore, because Federal law requires payments to be based on AWPs from more 
than a decade ago, a number of DME infusion drugs had payment amounts that were below their 
ASPs, meaning that Medicare may be reimbursing providers at less than their cost for these 
drugs. 
 
We recommended that CMS either (1) seek a legislative change requiring DME infusion drugs to 
be paid using the ASP-based methodology or (2) include DME infusion drugs in the next round 
of the competitive bidding program.  CMS partially concurred with the first recommendation, 
but the agency has not taken steps toward seeking legislation. CMS concurred with the second 
                                                 
7 CMS also  calculates ASP-based payment  amounts for DME  infusion  drugs for situations  when the drugs  are 

provided incident to a professional service  (e.g., the same drug is paid  on the basis of its ASP rather than its AWP 

when it is administered in a physicians office rather than infused in  a patients home).   

8 The total represents payments made by Medicare and beneficiaries (through coinsurance and deductibles). 

9  Medicare Claims Processing Manual, ch. 36   10. 

10 Ibid. 
	
11  Medicare Claims Processing Manual, ch. 36   20.1. 

Implementing OIG Recommendation Could Have Reduced Payments for DME Infusion Drugs by  
Hundreds of Millions of Dollars (OEI-12-15-00110)   Page 4  Andrew M. Slavitt 
 
recommendation but subsequently said that DME infusion drugs will not be included in 
competitive bidding until at least 2017.   
 
METHODOLOGY  
 
Scope 
This review focuses on Medicare payment amounts and ASPs for all DME infusion drugs from  
the second quarter of 2013 through the third quarter of 2014 (6 quarters in total).  Our previous 
work included only drugs identified as DME infusion on CMSs payment limit files.  For this 
review, we expanded the scope by also including DME infusion drugs identified through an 
analysis of the four DME MACs payment limit files.  
 
Data Collection and Analysis 
Selection of Drugs.  First, we used CMSs payment limit files from the second quarter of 2013 
through the third quarter of 2014 to identify all drugs with a DME infusion payment amount.  In 
total, 28 DME infusion drugs were listed on CMSs payment limit files in at least one of the 
quarters under review. 
 
Unlike CMSs files, which explicitly identify drugs that have DME infusion payment amounts, 
DME MAC files do not indicate whether a drug is categorized as such.  We  therefore analyzed 
the payment amounts on the quarterly DME MAC files to identify any drug for which the 
payment amount (1) did not change from quarter to quarter; (2) did not equal the ASP-based 
payment amount on the CMS payment file; and (3) did not vary among the individual DME 
MAC files.  We then used product descriptions from  CMSs procedure code file and information 
from drug packaging labels to verify that the drug could be infused through DME.  Our analysis 
of the DME MAC files identified an additional 22 drugs that were not listed as DME infusion on 
CMSs payment limit files.  In combining the list of drugs identified through our examination of 
CMSs payment limit files and our analysis of DME MAC files, we identified a total of 50 DME 
infusion drugs for the period under review. 
 
Total Part B Expenditures and Utilization for DME Infusion Drugs.  We obtained all paid Part B 
DME claims for the 50 DME infusion drugs from  the second quarter of 2013 through the third 
quarter of 2014.12  If a drug did not have any associated expenditures in a particular quarter, we 
removed the code from  the analysis for that quarter.  As a result, between 21 and 23 drugs were 
removed from our analysis in any given quarter. 
 
ASP- and AWP-Based Payment Amounts.  We obtained from  CMSs payment limit files the 
ASP-based payment amounts for all DME infusion drugs in every quarter under review.  
Similarly, we obtained the AWP-based payment amounts for the same period from  CMSs 
payment limit files and the four DME MACs payment limit files.  
 
   
                                                 
12 Expenditure data was extracted in October  2014 for dates of service between April 1, 2013, and September 30, 
2014. 
Implementing OIG Recommendation Could Have Reduced Payments for DME Infusion Drugs by  
Hundreds of Millions of Dollars (OEI-12-15-00110)   Page 5  Andrew M. Slavitt 

 
Estimated Acquisition Costs.  Because ASPs are based on actual sales in the marketplace, they 
provide a reasonable estimate of the acquisition costs of drugs for providers.  We used the 
ASP-based payment amounts to calculate ASPs in each quarter by dividing each drugs 
ASP-based payment amount by 1.06.13    
 
Determination of Potential Savings. For each drug, we multiplied its utilization by its 
ASP-based payment amount in every quarter to determine how much Medicare and its 
beneficiaries would have spent if payments for DME infusion drugs had been set at 106 percent 
of ASP.  We then subtracted the result from actual expenditures in the relevant quarter to 
determine the difference in spending between the AWP-based and ASP-based payment 
methodologies.  We added the quarterly results to determine the total reduction in expenditures 
for the 6 quarters under review.  To estimate how much beneficiaries coinsurance would be 
reduced, we multiplied this total by 20 percent.  
 
Comparing Medicare Payment Amounts and Estimated Acquisition Costs.  For each quarter, we 
calculated the difference between the AWP-based payment amount and the estimated acquisition 
cost (i.e., the  ASP) for each drug.  We then counted the number of DME infusion drugs that had 
Medicare payment amounts that exceeded their estimated acquisition costs and the number of 
drugs with Medicare payment amounts that were less than their estimated acquisition costs.  To 
determine an  overall difference between Medicare payment amounts and estimated acquisition 
costs across all DME infusion drugs, we calculated a median difference among all the individual 
drugs in each quarter.  
 
Limitations  
We did not review Part B DME claims for accuracy, nor did we review any documentation in 
support of the claims included in our study.  We also did not examine any infusion-related 
services that may have been provided to beneficiaries who received DME infusion drugs.   
 
Under sequestration, the effective payment rate for Part B drugs (including DME infusion drugs) 
was reduced between 1 and 2 percent.14  Neither the published pricing data nor CMS expenditure 
data reflect these reductions. Our comparisons of acquisition costs and our estimates of savings 
in this report were calculated without regard to sequestration and therefore may be minimally 
overstated.  In addition, our potential savings estimates are based on drug utilization under the 
current system; we did not estimate how a new payment methodology might change provider 
behavior and Medicare spending.    
                                                 
13 There is a  2-quarter  lag between the time when ASP sales  occur and  when Medicare payment  amounts  reflect  
those  sales.  As a result,  ASPs in a  given  quarter were  calculated using ASP-based payment  amounts from 2 quarters 
later. We removed  either one or three drugs from  our comparisons in each quarter because there were no ASP-based 
payment amounts on which to base our calculations.  In addition, in  a small  number of instances (once per quarter at  
most), a drugs  ASP-based payment  amount  was set at  103  percent of the average manufacturer price rather than at 
106 percent  of  the ASP.   In these cases,  we divided the payment amount by 1.03. 
14 CMS, Mandatory Payment Reductions in the Medicare Fee-for-Service (FFS) ProgramSequestration,  CMS 
Medicare FFS Provider e-News, March  8, 2013.  Accessed at http://www.cms.gov/outreach-and-education/outreach/  
ffsprovpartprog/downloads/2013-03-08-standalone.pdf on  April 10, 2015. 
Implementing OIG Recommendation Could Have Reduced Payments for DME Infusion Drugs by  
Hundreds of Millions of Dollars (OEI-12-15-00110)   Page 6  Andrew M. Slavitt 
 
Standards 
This study was  conducted in accordance with the  Quality Standards for Inspection and 
Evaluation issued by the Council of the Inspectors General on Integrity and Efficiency.   
 
RESULTS 
  
Medicare expenditures for DME infusion drugs could have been reduced by $251 million 
over just 6 quarters if the ASP-based payment methodology recommended by OIG had 
been implemented by April 2013 
 
If payment amounts for DME infusion drugs had been based on ASPs rather than decade-old 
AWPs between the second quarter of 2013 and the third quarter of 2014, total Medicare Part B 
spending would have decreased by 35 percent (from $712 million to $461 million), a reduction 
of $251 million.  Approximately one-fifth of this total ($50 million) would have been realized by 
beneficiaries in the form  of reduced coinsurance.  Table 1 shows spending under the two 
methodologies and potential savings in each quarter had payments for DME infusion drugs been 
set at 106 percent of ASP as recommended by OIG. 
 
Table 1: Potential Savings for DME Infusion Drugs Under the  ASP-Based Methodology   
Potential 
Actual Part B  Potential Savings at  Percentage 
Quarter   Expenditures at  
Expenditures*   106 Percent of  ASP   Reduction  
106 Percent of  ASP  
Q2 2013   $125,321,855   $83,664,076   $41,657,780   33%  
Q3 2013   $132,846,997   $86,766,567   $46,080,430   35%  
Q4 2013   $128,519,744   $81,581,528   $46,938,216   37%  
Q1 2014   $115,002,267   $74,883,495   $40,118,772   35%  
Q2 2014   $119,160,403   $77,168,028   $41,992,375   35%  
Q3 2014   $91,476,968   $56,996,730   $34,480,238   38%  
Total   $712,328,235   $461,060,424   $251,267,812   35%  
Source: OIG analysis of CMS and DME MAC payment files and CMS  expenditure and utilization data. 

Note: Totals may not equal the sums of the rows due to rounding.  All figures include both the  Medicare and beneficiary  shares. 

* Expenditure data  was extracted  in October 2014 for  dates of service between April  1, 2013, and September 30, 2014. 
 
Lowering payment amounts for just two of the three highest-expenditure drugsmilrinone 
lactate and Hizentrawould have led to $267 million in reduced payments.  During the 
6 quarters under review, Medicare payments to 375 providers for milrinone lactate would have 
been reduced by almost $166 million had reimbursement been set at 106 percent of ASP.  
Similarly, payments to 363 providers for Hizentra would have been reduced by $101 million 
during the same time frame.  
 
Because the ASP-based payment amounts for some drugs were higher than the existing 
AWP-based payment amounts, Medicare spending would have increased for some drugs.  For 
example, Medicare spending would have increased by $31 million for 9 drugs over the 
6 quarters.  However, Medicare spending would have been lowered by $282 million for 21 other 
drugs, resulting in a net reduction of $251 million.15   
                                                 
15 Medicare expenditures would have remained unchanged for  one additional drug. 
Implementing OIG Recommendation Could Have Reduced Payments for DME Infusion Drugs by  
Hundreds of Millions of Dollars (OEI-12-15-00110)   Page 7  Andrew M. Slavitt 

 
 
At least 42 percent of DME infusion drugs had Medicare payment amounts  that were  more  
than twice their estimated acquisition costs in each quarter  
 
Our analysis indicates that again, Medicare paid providers substantially more than their costs for 
many DME infusion drugs.  Overall, AWP-based payment amounts exceeded estimated 
acquisition costs by 35 to 85 percent, at the median, in each quarter.  Among individual drugs, 
the quarterly AWP-based payment amounts were often more  than twice the estimated acquisition 
costs.16  For example, the AWP-based payment amount for milrinone lactate has been set at 
$51.58 for more than 10 years.  However, during the period under review, the estimated 
acquisition cost of milrinone lactate ranged from  $2.44 to $3.99, meaning that Medicare paid 
providers 13 to 21 times their estimated cost for the drug.  On average, milrinone lactate 
providers each spent $31,312 to acquire the drug during the 6 quarters, and were reimbursed 
$475,330 for these purchases by Medicare, a net difference of almost $450,000. 
 
Figure 1 illustrates the disparity between Medicare payment amounts and provider acquisition 
costs for milrinone lactate and five other high-expenditure drugs that together accounted for 
97 percent of Part B spending on DME infusion drugs. 
 
Figure 1: Differences Between Part B Payment Amounts and Acquisition Costs for the 
Six Highest-Expenditure DME Infusion Drugs in the Third Quarter of 2014  
$70 
7% 
$60 
42%  1,608% 
$50 
s  $40 
r
a
oll
D $30 
$20 
92% 
-13% 
$10  -44% 
$0 
epoprostenol  insulin  Gammagard*  treprostinil  milrinone  Hizentra* 
.5 mg  50 units  500 mg  1 mg  lactate 5 mg  100 mg 
DME Infusion Drug 
Part B Payment Amount  Estimated Acquisition Cost 
 
 
Source:  OIG analysis of CMS and DME MAC quarterly payment limit  files  and Part B claims  data. 

*Immune globulin. 

 
Note: Negative percentages indicate that estimated acquisition  costs  are  greater than Part  B payment amounts.
	  
                                                 
16 Each quarter, between 42 percent and 46 percent of  DME infusion drugs had  Medicare  payment  amounts that  
were more than double their estimated acquisition costs.  
Implementing OIG Recommendation Could Have Reduced Payments for DME Infusion Drugs by  
Hundreds of Millions of Dollars (OEI-12-15-00110)   Page 8  Andrew M. Slavitt 

 
Approximately one-quarter of DME infusion drugs had Medicare payment amounts that 
were below  estimated acquisition costs  
 
From the second quarter of 2013 through the third quarter of 2014, 71 to 75 percent of DME 
infusion drugs had Medicare payment amounts that exceeded their estimated acquisition costs.  
In contrast, 25 to 29 percent of drugs (as many as eight drugs per quarter) had Medicare payment 
amounts that were below their estimated costs, some by as much 88 percent.  In other words, 
Medicare reimbursement may not have been sufficient to cover the average cost of these drugs 
for providers, possibly because payment amounts have remained unchanged since 2003.  For 
example, providers paid, on average, between $5.01 and $5.98 for 50 units of insulin (for use in 
an infusion pump) during the period under review.  The Medicare payment amount, based on 
AWPs from  2003, remained at $2.80.  As a result, providers who billed Medicare for insulin, 
which was one of the six highest-expenditure DME infusion drugs, may have been reimbursed at 
$20 million below their total costs for purchasing  the drug (50 percent) over these 6 quarters.  
 
CONCLUSION 
 
Our findings again illustrate that Medicares payment methodology for DME infusion drugs, 
which relies on AWPs published in 2003, has resulted in payments that bear little or no 
resemblance to provider acquisition costs.  Under this methodology, providers are being 
reimbursed for many drugs at double their costs, while recouping only half of their costs for 
other drugs. OIG recommended in February 2013 that CMS seek a legislative change that would 
require DME infusion drugs to be paid under the same ASP-based methodology that is used for 
almost all other Part B drugs.  If this legislative change had been enacted subsequent to OIGs 
recommendation, Medicare expenditures for DME infusion drugs could have been reduced by 
$251 million over 18 months.  These payment-related issues could also affect drug utilization.  
For example, payments that substantially exceed costs could present incentives for providers to 
overutilize a particular product, while payments that are below cost could contribute to 
providers inability or unwillingness  to provide a particular drug.   
 
OIG continues to recommend that CMS seek a legislative change that would require payments 
for DME drugs to be based on ASPs.  We recognize that seeking such a change through the 
legislative proposal process would not in itself change payments unless Congress chooses to 
enact this change.  Therefore, we also continue to recommend that CMS use its existing authority 
to include DME infusion drugs in the competitive bidding program.  We cannot predict exactly 
how competitive bidding would affect Medicare spending on DME infusion drugs; however, 
according to  CMS, Phase 2 of competitive bidding has reduced Medicare payments for other 
DME by an average of 45 percent.17  
 
This report contains no new recommendations and is thus being issued directly in final form.  If 
you have comments or questions about this report, please do not hesitate to call me, or one of 
your staff may contact David Tawes, Regional Inspector General for Evaluation and Inspections, 
                                                 
17 CMS, Round 2 Weighted Average Savings. Accessed at http://www.dmecompetitivebid.com/Palmetto/  
Cbicrd2.Nsf/files/R2_Weighted_Average_Savings.pdf/$File/R2_Weighted_Average_Savings.pdf  on February  6,  
2015. 
Implementing OIG Recommendation Could Have Reduced Payments for DME Infusion Drugs by  
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at (410) 786-6783 or david.tawes@oig.hhs.gov. Please refer to report number OEI-12-15-00110 
in all correspondence. 
 
Implementing OIG Recommendation Could Have Reduced Payments for DME Infusion Drugs by  
Hundreds of Millions of Dollars (OEI-12-15-00110)