Department  of Health  and Human  Services 
OFFICE OF 
INSPECTOR GENERAL 
SUPPLIERS  ACQUISITION  COSTS 
FOR  ALBUTEROL  SULFATE  OFFICE  OF INSPECTOR  GENERAL 
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 three  OIG  operating  components:  the  Office of Audit  Services,  the 
Office of Investigations,  and the  Office of Evaluation  and Inspections.  The  OIG  also informs 
the  Secretary  of HHS  of program  and management  problems  and recommends  courses  to 
correct  them. 
OFFICE OF AUDIT  SERVICES 
The  OIGS Office of Audit  Services  (OAS)  provides  all auditing  services for HHS,  either  by 
conducting  audits with its own audit resources  or by overseeing  audit work done  by others. 
Audits  examine  the  performance  of HHS  programs  and/or  its grantees  and contractors  in 
carrying out  their  respective  responsibilities  and are intended  to provide  independent 
assessments  of HHS  programs  and operations  in order  to reduce  waste,  abuse,  and 
mismanagement  and to promote  economy  and efficiency throughout  the Department. 
OFFICE OF INVESTIGATIONS 
The  OIGS Office of Investigations  (01)  conducts  criminal, civil, and administrative 
investigations  of allegations  of wrongdoing  in HHS  programs  or to HHS  beneficiaries  and of 
unjust  enrichment  by providers.  The investigative  efforts  of 01  lead to criminal  convictions, 
administrative  sanctions,  or civil money penalties.  The  01  also oversees  State  Medicaid  fraud 
control  units which investigate  and prosecute  fraud  and patient  abuse  in the  Medicaid  program. 
OFFICE OF EVALUATION  AND  INSPECTIONS 
The  OIGS  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 these  inspection 
reports  generate  rapid,  accurate,  and up-to-date  information  on the  efficiency, vulnerability, 
and effectiveness  of departmental  programs.  This report  was prepared  in the  Philadelphia 
Regional  Office under  the direction  of Robert  A. Vito,  Regional  Inspector  General. 
PHILADELPHIA  REGIONAL  STAFF  HEADQUARTERS  STAFF 
Robert  A. Katz, ProjectLeader  Mary Beth  Clarke, ProgramSpecialist

Amy J. Sernyak,  ProgramAnalyst

Karen  Folk, Intern

To obtain copies of this report, please call the Philadelphia  Regional  Office at (800) 531-9562  Department  of Health  and Human  Services 
OFFICE OF 
INSPECTOR GENERAL 
SUPPLIERS  ACQUISITION  COSTS 
FOR  ALBUTEROL  SULFATE  EXECUTIVE  SUMMARY 
PURPOSE 
This  report  examines  suppliers  acquisition  costs  and  Medicare  allowances  for 
albuterol  sulfate,  an inhalation  prescription  drug  used  in conjunction  with nebulizers. 
BACKGROUND 
Title  XVIII  of the  Social  Security  Act  prescribes  coverage  requirements  under  Part  B 
of the  Medicare  program.  Part  B covered  items  and  services  include  durable  medical 
equipment  (DME)  as well as certain  outpatient  prescription  drugs.  The  Health  Care 
Financing  Administration  (HCFA)  administers  the  Medicare  program. 
Medicare  does  not  generally  pay for outpatient  prescription  drugs.  However,  there 
are  several  exceptions  to this general  rule,  including  payment  for  drugs  used  in 
conjunction  with  durable  medical  equipment  (DME),  such  as a nebulizer.  For  such 
drugs,  Medicare  computes  an allowed  amount  based  on the  lower  of estimated 
acquisition  costs  (EACS)  or the  median  of national  average  wholesale  prices  (AWPS). 
Medicare  allowed  amounts  for  all inhalation  drugs  remained  relatively  stable  during 
1990 through  1992, never  exceeding  about  $78 million  annually.  In  1993, allowances 
rose  to about  $170 million,  and  climbed  to about  $227 million  in 1994, an increase  of 
almost  200 percent  since  1990.  During  the  14-month  period  of our  review--January  1, 
1994 through  February  28, 1995--allowances  for inhalation  drugs  totaled  approximately 
$269 million.  The  subject  of this study--albuterol  sulfate--accounted  for more  than 
$182 million  in allowances  during  the  14-month  period. 
In this report,  we examine  Medicare  payments  for  albuterol  sulfate  compared  to 
suppliers  acquisition  costs for the  drug.  Albuterol  sulfate  is the  most  commonly 
prescribed  inhalation  drug  used  for nebulizer  therapy.  This  report  is one  of a series  of 
Office  of Inspector  General  (OIG)  inspections  concerning  Medicare  payments  for 
outpatient  prescription  drugs  in general  and  inhalation  drugs in particular. 
FINDINGS 
Medicarek  allowances  for  albuterol  sulfate  substantidj  exceed  supplitm acquisition  costs 
for  the drug. 
Suppliers  pay an average  cost of $0.19 per  milliliter  (ml)  to purchase  albuterol 
sulfate,  while  Medicares  allowed  amounts  ranged  from  $0.40 per  ml to $0.43 
per  ml during  the  period  of our  review.  Medicare  could  have  saved  $94 million 
during  the  14-month  period  of our  review  if albuterol  sulfate  allowances  had 
been  based  on the  average  of supplier  invoice  costs. 
i  Average  supplier  costs for  albuterol  sulfate  ranged  from  $0.14 per  ml to $0.23 
per  ml depending  on the  purchase  source.  Suppliers  purchasing  albuterol 
sulfate  directly  from  a manufacturer  paid  the  lowest  average  cost, $0.14 per ml. 
When  purchased  from  wholesalers,  suppliers  paid  an  average  of $0.20 per  ml. 
Suppliers  purchasing  the  drug  from  pharmacies  paid  the  highest  average  cost, 
$0.23 per  ml.  Most  of the  albuterol  sulfate  billed  to the  Medicare  program  was 
the  generic  form  of the  drug. 
RECOMMENDATIONS 
The  findings  of this report  indicate  that  Medicares  allowances  for albuterol  sulfate 
substantially  exceed  suppliers  costs for the  drug.  During  the  period  of our  review, 
Medicare  reimbursed  suppliers  at allowed  amounts  ranging  from  $0.40 to $0.43 per  ml 
of albuterol  sulfate.  These  allowances  were  based  on drug  manufacturers  AWPS. 
Current  HCFA  regulations  allow Medicare  reimbursement  to be based  on the  lower  of 
EAC  or median  AWP.  However,  HCFA  has been  unsuccessful  in obtaining  the  data 
to determine  EAC. 
We  believe  our  invoice  cost analysis  further  supports  the  recommendation  made  in an 
earlier  OIG  report  entitled  Medicare  Payments for Nebulizer  Drugs (OEI-03-94-O0390). 
In that  report,  we suggested  various  options  and  recommended  that  HCFA  should 
reexamine  its Medicare  drug reimbursement  methodologies  with the goal of reducing 
payments for prescription  drugs.  Options  included  a discounted  wholesale  price, 
manufacturers  rebates,  competitive  bidding,  inherent  reasonableness,  and  acquisition 
cost.  For  our  readers  convenience,  we have  included  the  full text  of these  options  in 
the  Recommendation  section  of this report. 
HCFA  COMMENTS 
The  HCFA  concurred  with  our  recommendation.  In exploring  new strategies  for 
changing  Medicares  payment  for prescription  drugs,  HCFA  has  constructed  a 
framework  to calculate  drug  prices  centrally.  They  are  also reviewing  other 
approaches  that  could  improve  Medicare  drug reimbursement.  For  the  complete  text 
of HCFAS comments,  see Appendix  D. 
OIG  RESPONSE 
We  support  HCFAS efforts  to revise  its drug  reimbursement  mechanisms  to more 
appropriately  pay for prescription  drugs  covered  under  the  Medicare  program.  We 
believe  revisions  to the  current  payment  methodologies  that  take  into  account  the 
actual  costs of these  drugs would  provide  significant  savings to the  Medicare  program. 
11  TABLE  OF  CONTENTS

EXECUTIVE  SUMMARY

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

FINDINGS  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ...6

.  Medicares  allowances  exceed  suppliers  acquisition  costs  . . . . . . . . . . . . . . . . .  6

RECOMMENDATIONS  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9

APPENDICES  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

kNonrespondent  Analysis..  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ..A-l

B:  Cost Estimates  and  Confidence  Intervals  . . . . . . . . . . . . . . . . . . . . . . . . . . . .  B-1

C  Calculation  of Potential  Medicare  Savings  . . . . . . . . . . . . . . . . . . . . . . . . . . .  C-1

D:  Agency  Comments  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ..D-l
 INTRODUCTION

PURPOSE 
This report  examines  suppliers  acquisition  costs and  Medicare  allowances  for 
albuterol  sulfate,  an inhalation  prescription  drug used  in conjunction  with nebulizers. 
BACKGROUND 
Title  XVIII  of the  Social  Security  Act  prescribes  coverage  requirements  under  Part  B 
of the  Medicare  program.  Part  B covered  items  and  services  include  durable  medical 
equipment  (DME)  as well as certain  outpatient  prescription  drugs.  The  Health  Care 
Financing  Administration  (HCFA)  administers  the  Medicare  program. 
Medicare  Coverage of Presaiplion  Drugs 
Medicare  does  not  generally  pay for outpatient  prescription  drugs.  However,  there 
are  several  exceptions  to this general  rule.  These  exceptions  are  detailed  in section 
2100.5 of the  Medicare  Carriers  Manual  which  specifies  instances  involving  covered 
uses of outpatient  prescription  drugs,  including  drugs  used  in conjunction  with  DME. 
The  Manual  states  that  drugs  are  covered  under  Part  B as long as the  drugs  are 
necessary  for the  effective  use  of the  DME. 
A nebulizer  is a type  of DME  through  which prescription  drugs  are  administered  for 
inhalation  therapy.  It consists  essentially  of two components:  (1) a power  source  such 
as an air compressor  or ultrasonic  device,  and  (2) a dispensing  mechanism  consisting 
of flexible  tubing,  a mouthpiece,  and  liquid  reservoir.  The  nebulizer  is used  by placing 
an inhalation  prescription  drug  into  its reservoir  which is then  converted  into  a fine 
spray  by the  power  source  and  inhaled  by the  user. 
In accordance  with HCFA  policy, if a beneficiary  has  a severe  respiratory  illness  or 
disease,  Medicare  will pay for certain  inhalation  drugs  that  transform  a nebulizer  into 
effective  therapy  for that  condition.  Medicare  guidelines  stipulate  that  the  prescribed 
drug  must  be  used  to deliver  respiratory  therapy,  and  the  nebulizer  must  be  the  means 
to deliver  that  therapy.  If these  conditions  are  met,  Medicare  will reimburse  both  the 
inhalation  drug  and  the  nebulizer  for as long as the  drug  is necessary  for  the  effective 
use  of the  nebulizer. 
According  to HCFA  Part  B data,  Medicare  allowed  amounts  for  all inhalation  drugs 
remained  relatively  stable  during  the  years  1990 through  1992, never  exceeding  about 
1
 $78 million  annually .1  In  1993, allowances  increased  to  about  $170 million  and  rose 
to about  $227 million  in 1994, an increase  of almost  200 percent  from  1990.  During 
the  14-month  period  of our  review--January  1, 1994 through  February  28, 1995--
allowed  amounts  for inhalation  drugs  totaled  about  $269 million. 
Albuterol  Sulfate Allowances 
Albuterol  sulfate  0.083%,  hereafter  referred  to as albuterol  sulfate,  is the  most

commonly  prescribed  inhalation  drug  for nebulizer  therapy.  Medicare  allowances  for

albuterol  sulfate  exceeded  $182 million  during  the  14-month  period  of our  review,

representing  68 percent  of total  allowances  for all nebulizer  drugs.

Medicare  determines  drug  allowances  based  on the  lower  of estimated  acquisition

costs  (EAC)  or national  average  wholesale  prices  (AWP)  according  to 42 Code  of

Federal  Regulations  405.517.  Resulting  allowed  amounts  are  the  prices  that  Medicare

and  its beneficiaries  pay  drug  suppliers  or pharmacies.  If a drug  has  multiple  sources,

like  albuterol  sulfate,  the  price  is based  on the  lower  of the  EAC  or the  median  of

national  AWPS for  all generic  sources.  Medicare  calculates  the  median  AWP  using

Z7ieRed Book  or similar  sources  which  list the  average  wholesale  prices

pharmaceutical  companies  self-report  for their  products.  An EAC  is determined

based  on surveys of the  actual  invoice  prices  suppliers  pay for drugs.

Pharmacies  or DME  suppliers  use  a drug-specific  procedure  code,  J7620,  to claim

Medicare  reimbursement  for albuterol  sulfate.  This  code  identifies  the  product,  but

not  the  drug  manufacturer.  Therefore,  it does  not  indicate  whether  the  dispensed

drug  is a brand-name  drug  or generic  equivalent.

The  HCFA  designated  four  Durable  Medical  Equipment  Regional  Carriers

(DMERCS)  to process  all claims for DME,  prosthetics,  orthotics,  and  medical  supplies,

including  nebulizer  drugs.  Effective  October  1, 1993, the  DMERCS  replaced  local

carriers  which  had  previously  processed  these  claims.  Each  DMERC  determines

allowances  for  albuterol  sulfate  in its respective  region  based  on the  guidelines  stated

in the  regulations.  During  the  scope  of our review,  DMERC  allowances  for  albuterol

sulfate  were  based  on median  AWP  calculations  and  ranged  from  $0.40 to $0.43 per

milliliter  (ml).  Medicare  will also pay drug  suppliers  a monthly  dispensing  fee  of $5

for each  drug  in addition  to the  payment  for the  drug  itself.

This  study was conducted  as part  of Operation  Restore  Trust,  an initiative  combining

the  forces  of multiple  agencies  to combat  Medicare  and  Medicaid  fraud,  waste,  and

abuse  in five States.  The  five States--California,  Florida,  Illinois, New York,  and

Texas--account  for  40 percent  of the  nations  Medicare  and  Medicaid  beneficiaries.

10ffice  of Inspector  General,  Medicare  Part B - Reimbursement  to Providers for 
Drugs Used in Conjunction  with Durable  Medical  Equipment,  A-06-92-00079 
(Washington,  D.C.:  U.S. Department  of Health  and  Human  Services,  1995), 3. 
2  The  initiative  centers  on services  provided  by DME  suppliers  in addition  to services 
provided  by nursing  homes,  hospices,  and  home  health  agencies. 
RelatedWorkbythe  OjJiceofInspector  General 
This report  is one  ofaseries  of Office  of Inspector  General  (OIG)  inspections 
concerning  Medicare  payments  for outpatient  prescription  drugs  in general  and 
inhalation  drugs  in particular.  Earlier  this year,  we released  a report  entitled  Medicare 
Payments  for Nebulizer  Drugs (OEI-03-94-O0390).  We  found  that  Medicaid  reimbursed 
albuterol  sulfate  and  other  nebulizer  drugs  at significantly  lower  prices  than  Medicare. 
In a related  report  called A  Comparison  of Albuterol  Su~ate  Prices (OEI-03-94-00392), 
we found  that  many  pharmacies,  pharmaceutical  buying  groups  and  mail-order 
pharmacies  charged  customers  less for generic  albuterol  sulfate  than  Medicares 
allowed  reimbursement.  A forthcoming  report,  Questionable  Medicare  Payments  for 
Nebulizer  Drugs (OEI-03-94-00391),  examines  coverage,  utilization,  and  medical 
necessity  issues  relating  to the  use  of albuterol  sulfate  in nebulizers  by Medicare 
beneficiaries. 
In an  earlier  report,  Medicare  Part B--Reimbursement  to Providers for Drugs used in 
Conjunction  with Durable Medical  Equipment  (CIN-A-06-92-OO079),  we  found  that 
HCFA  lacked  clear  legislative  authority  to cover  self-administered  outpatient 
prescription  drugs.  Additionally,  we concluded  there  was no  assurance  that  drugs were 
properly  priced  and  paid  because  HCFA  did not  require  carriers  to  obtain  detailed 
pricing  information.  We  recommended  that  HCFA  seek  legislation  to  expressly 
authorize  the  coverage  of drugs  used  with DME  and  implement  policies  and 
procedures  to ensure  that  carriers  properly  price  and  pay prescription  drugs. 
METHODO~GY 
We  obtained  pertinent  background  information  on inhalation  drugs  used  in nebulizers 
from  a wide variety  of sources,  including  HCFA  officials, DMERC  medical  directors 
and  utilization  review  personnel,  medical  equipment  suppliers,  and  pharmacies. 
Focusing  on albuterol  sulfate,  the  inhalation  drug  most  frequently  reimbursed  under 
Medicare,  we selected  a stratified  random  sample  of 485 claims for  albuterol  sulfate 
(procedure  code  J7620)  from  a HCFA  One  Percent  DME  Claims  File.  Seven  strata 
were  designated  in the  sampling  plan:  one  for each  of the  five Operation  Restore 
Trust  States,  Puerto  Rico,  and  a strata  comprised  of J7620  claims  from  all other 
States.  Service  dates  were  confined  to the  14-month  period  of our  review,  January  1, 
1994 through  February  28, 1995. 
We  mailed  requests  for information  to the  suppliers  that  billed  Medicare  for the  485 
sampled  albuterol  sulfate  claims.  (In this report,  we use the  term  supplier  to 
indicate  the  entity  which billed  Medicare  for providing  the  nebulizer  drug  to the 
beneficiary.)  These  requests  covered  a variety  of subjects,  including  (1) supplier 
business  characteristics,  (2) how the  supplier  obtained  and  delivered  the  nebulizer 
3  drug  to the  beneficiary,  (3) description  of the  drug  provided,  and  (4) drug 
procurement  costs and  related  drug  costs.  We  asked  suppliers  to submit  copies  of 
documents  from  their  files, such as physician  prescriptions,  invoices  showing  drug 
procurement  costs, and  beneficiary  medical  information,  to support  each  sampled 
J7620  claim. 
Supplier Response Rates 
Suppliers  returned  completed  requests  for 418 of the  485 sampled  J7620  claims  (86 
percent  response  rate).  Some  respondents  did not,  however,  submit  copies  of all of 
the  claim-supporting  documentation  that  we requested.  We  contacted  these  suppliers 
by telephone  and  letter  to secure  missing  documentation.  After  executing  this follow-
up plan,  we achieved  a 47 percent  overall  response  rate  for claim-supporting  albuterol 
sulfate  invoices.  However,  invoice  response  rates  varied  widely by strata.  These  strata 
response  rates  are  presented  in Appendix  A. 
Nonreqxmdent  and Invoice  Cost Analjsex 
As mentioned  above,  a 47 percent  response  rate  for claim-supporting  invoices  was 
achieved.  To  address  the  potential  bias  effects  that  suppliers  who  did not  provide 
albuterol  sulfate  invoices  may have  had  on our  cost estimates,  we conducted  a chi-
square  analysis  of nonrespondents  (a statistical  method  used  to test  a hypothesis 
between  observed  and  expected  results).  Chi-square  analysis indicates  that  there  is a 
significant  difference  between  suppliers  who  provided  invoices  and  those  who  did not 
provide  invoices  with  respect  to asset  size.  Suppliers  in our  sample  possessing  assets 
in excess  of $100 million  were  less likely to submit  invoices  to support  their  albuterol 
sulfate  claims.  The  table  in Appendix  A shows that  only 5 percent  of claims billed  by 
suppliers  owning  assets  over  $100 million  were  supported  with invoices.  In contrast, 
invoices  were  submitted  for 61 percent  of claims billed  by suppliers  owning  assets 
under  $100 million. 
Cost  estimates  were  computed  based  on a sample  of claim-supporting  invoices  for 
albuterol  sulfate  submitted  by supplier  respondents.  (Cost  estimates  and  associated 
confidence  intervals  appear  in Appendix  B.)  However,  our  calculations  may 
overestimate  average  supplier  invoice  costs.  As explained  above,  there  is a 
relationship  in our  sample  between  suppliers  submission  of invoices  and  the  size of 
their  assets.  We believe  large  suppliers  owning  assets  over  $100 million  may be  able 
to use their  market  power  to negotiate  low costs for  albuterol  sulfate  with  drug 
manufacturers,  wholesale  outfits,  and  pharmacies. 
The  overall  estimate  of average  supplier  cost for albuterol  sulfate  was applied  to a 
conservative  calculation  of total  albuterol  sulfate  units  reimbursed  by Medicare  from 
January  1994 through  February  1995.  These  calculations,  presented  in Appendix  C, 
illustrate  the  magnitude  of potential  program  savings if Medicare  allowances  for 
albuterol  sulfate  were  based  on supplier  invoice  costs. 
4
 This inspection  was conducted  in accordance  with the  Quali~  Standards for  Inspechons 
issued  by the  Presidents  Council  on Integrity  and  Efficiency. 
J  FINDINGS

MEDICARES  ALLOWANCES  FOR  ALBUTEROL  SULFATE  SUBSTANTIALLY 
EXCEED  SUPPLIERS  ACQUISITION  COSTS  FOR  THE  DRUG. 
  Supplikm are paying an average cost of $0.19 per ml for albuterd  sulfate. 
During  the  period  of our  review,  January  1994 through  February  1995, Medicare 
allowed  amounts  for  albuterol  sulfate  ranged  from  $0.40 per  ml to $0.43 per  ml. 
Clearly,  nebulizer  drug  suppliers  acquisition  costs for the  drug,  averaging  $0.19 per  ml, 
are  significantly  lower  than  Medicares  AWP-based  reimbursements.  Medicare 
allowances  for albuterol  sulfate,  based  on a median  of national  AWPS, totaled  over 
$182 million  for this period.  If HCFA  had  based  its reimbursement  for albuterol 
sulfate  on the  average  of supplier  invoice  costs,  as collected  in our  survey, the 
Medicare  program  could  have  saved  $94 million  during  the  14-month  period  of our 
review.  (See  Appendix  C)  Determination  of prescription  drug  allowances  based  on 
EAC--requiring  surveys of supplier  invoices--is  one  of the  methods  presently 
authorized  by Medicare  reimbursement  regulations. 
We  estimated  an overall  average  supplier  cost for  albuterol  sulfate  of $0.19. 
Respondents  submitted  three  distinct  types  of claim-supporting  invoices  for  albuterol 
sulfate:  manufacturer  invoices,  wholesale  company  invoices,  and  pharmacy  invoices. 
These  invoices  reflect  three  different  purchase  sources.  Therefore,  supplier  costs for 
albuterol  sulfate  varied  widely, ranging  from  a low of $0.12 to a high  of $0.41.  To 
address  this variability,  we calculated  average  supplier  cost estimates  by invoice  type. 
The  chart  below  compares  cost estimates  per  ml for each  purchase  type  to Medicares 
lowest  reimbursement  per  ml of albuterol  sulfate  during  the  sample  period. 
Supplier Costs Compared to 
Medicare Lowest Allowance 
 
Pri@ml  PurchaaeSource  !g#jMefMcare 
$0.50 
$0.40 
$0.30 
$0.20 
$0.10 
$0.00 
Manufacturer  Wholesaler  Pharmacy 
6
 	 ??%enpudased  from  a drug manufacture~  the average supplier cost per ml of 
albuterol dfate  was $0.14. 
Thirty-two  percent  of sampled  claims were  billed  by suppliers  who purchased  generic 
albuterol  sulfate  from  a drug  manufacturer.  In our  sample,  suppliers  costs paid  to the 
drug  manufacturer  ranged  from  $0.12  to $0.17.  Medicares  lowest  allowance  per  ml 
for  albuterol  sulfate  during  the  sample  time  frame  was $0.40.  This  allowed  amount  is 
almost  three  times  the  drug  manufacturer  invoice  price  average  of $0.14. 
	 l%e average cost per ml of albuterol sz@ate was $0.20 when suppllenspurchased 
the drug ji-om wholesale companies. 
Twenty-three  percent  of sampled  claims were  billed  by suppliers  purchasing  the 
nebulizer  drug  from  wholesalers.  While  suppliers  purchasing  from  drug 
manufacturers  were  able  to obtain  albuterol  sulfate  at the  most  advantageous  costs, 
those  paying  wholesale  costs were  reimbursed  by the  Medicare  program  at rates  at 
least  two times  greater  than  the  wholesaler  costs  estimate. 
	 Supplkm purchasing albuterol sulfate @m  phannucies paid  an average cost per ml 
of $0.23. 
Forty-five  percent  of sampled  claims were  billed  by suppliers  who purchased  albuterol 
sulfate  from  pharmacies.  These  suppliers  received  Medicare  reimbursements  at least 
1.8 times  greater  than  the  $0.23 pharmacy  cost estimate. 
Invoices  of this type  indicate  the  cost suppliers  pay to  a pharmacy,  not  the  cost that 
the  pharmacy  incurs  for the  drug.  Nebulizer  drug  suppliers  buying  albuterol  sulfate 
from  pharmacies  may be  paying  for not  only the  drug, but  also the  cost of related 
services  provided  by pharmacies.  These  services  may include  dispensing,  packaging 
and/or  shipping  the  drug  to Medicare  beneficiaries.  Therefore,  costs paid  by suppliers 
purchasing  the  drug  from  pharmacies  were  less competitive  than  those  paid  to 
manufacturers  and wholesalers. 
only  43 percent  of sample  claims were  billed  by suppliers  who provided  information 
on their  additional  costs.  Most  suppliers  did not  quantify  these  other  costs per  ml of 
albuterol  sulfate.  Rather,  these  suppliers  listed  general  types  of additional  expenses 
including  sales, billing  and  support  personnel,  respiratory  therapists,  drivers,  24-hour 
service,  home  delivery,  insurance,  and  storage.  Suppliers  also noted  expenses  such as 
packaging,  Iabelling,  shipping,  and  delivexy of the  drug.  	 Most albuterol @ate  bilkd  to the Medicare program was the generic form  of the 
drug. 
Suppliers  submit  claims  for albuterol  sulfate  to Medicare  under  the  HCFA  Common 
Procedure  Coding  System  code,  J7620.  Suppliers  bill code  J7620 whether  the 
albuterol  sulfate  they  provided  to beneficiaries  was brand  name  or generic  in form. 
Our  analysis  indicates  that  90 percent  of sampled  claims were  supported  by supplier 
invoices  for generic,  non-compounded  albuterol  sulfate.  In contrast,  only six percent 
of sampled  claims were  supported  by supplier  invoices  for brand  name  albuterol 
sulfate. 
The  remaining  four  percent  of sampled  claims were  supported  by invoices  for the 
ingredients  suppliers  use  to compound  albuterol  sulfate.  Suppliers  compound 
albuterol  sulfate  on an individual  basis  from  prescribed  ingredients.  We  could  not 
determine  unit  cost per  ml of albuterol  sulfate  from  the  compounding  ingredient 
invoices.  Therefore,  these  invoices  were  not  included  in the  cost analysis. 
8 RECOMMENDATIONS

The  findings  of this report  indicate  that  Medicares  allowances  for albuterol  sulfate  are 
excessive  compared  to suppliers  costs for the  drug.  During  the  period  of our review, 
Medicare  reimbursed  suppliers  at allowed  amounts  ranging  from  $0.40 to $0.43 per  ml 
of albuterol  sulfate.  These  allowances  were  based  on drug manufacturer  AWPS. 
Current  HCFA  regulations  allow Medicare  reimbursement  to be based  on the  lower  of 
EAC  or median  AWP.  However,  HCFA  has been  unsuccessful  in gathering  the  data 
to determine  EAC. 
If the  HCFA  had  based  its reimbursement  for albuterol  sulfate  on the  average  of 
supplier  invoice  costs, as illustrated  in this report,  the  Medicare  program  could  have 
saved  $94 million  during  the  14-month  period  of our  review.  Although  we recognize 
that  suppliers  of albuterol  sulfate  incur  other  costs related  to inhalation  therapy  in 
addition  to the  cost of the  drug, we believe  current  Medicare  reimbursements  more 
than  compensate  suppliers  for these  costs  along with  a reasonable  profit  margin. 
We believe  our  invoice  cost analysis  further  supports  a recommendation  made  in an 
OIG  report  entitled  Medicare  Payments for Nebulizer  Drugs.  We  previously 
recommended  that  HCFA  reexamine  its Medicare  drug  reimbursement  methodologies 
with  the  goal  of reducing  payments  as appropriate. 
For  our  readers  convenience,  we repeat  here  the  options  contained  in our  prior 
report  for changing  Medicares  payments  for prescription  drugs. 
Discounted  Wholesale  Price 
Many  Medicaid  State  agencies  use  a discounted  AWP  to establish  drug  prices. 
Medicare  should  have  a similar  option.  Medicare  could  base  its drug  payment  on the 
lower  of a discounted  AWP  or the  median  of the  AWP  for all generic  sources, 
whichever  results  in the  lower  cost to Medicare  and  its beneficiaries.  To  implement 
this recommendation,  HCFA  would  have  to revise  Medicares  claims  coding  system 
which  does  not  identify  the  manufacturer  or indicate  if the  drug  is a brand  name  or a 
generic  equivalent,  information  that  is needed  to discount  the  AWP  and  obtain  a 
rebate  for  a specific  drug.  Medicaid  uses the  National  Drug  Code  (NDC)  in 
processing  drug  claims.  The  NDC  identifies  the  manufacturer  and  reflects  whether  the 
drug  is a brand  name  or a generic  equivalent. 
Manufacturers  Rebates 
Medicare  could  develop  a legislative  proposal  to establish  a mandated  manufacturers 
rebate  program  similar  to Medicaids  rebate  program.  We recognize  that  HCFA  does 
not  have  the  authority  to simply establish  a mandated  manufacturers  rebate  program 
similar  to the  program  used  in Medicaid.  Legislation  was required  to establish  the 
Medicaid  rebate  program,  and  would  also be  required  to establish  a Medicare  rebate 
9  program.  Wehavenot  thoroughly  assessed  howa  Medicare  rebate  program  might 
operate,  what  administrative  complexities  it might  pose,  or how a Medicare  rebate 
program  might  differ  from  a Medicaid  rebate  program.  We believe,  however,  the 
legislative  effort  would  be worthwhile.  The  same  manufacturers  that  provide  rebates 
to Medicaid  make  the  drugs  that  are  used  by Medicare  beneficiaries  and  paid  for by 
the  Medicare  program. 
Competitive  Bidding 
Medicare  could  develop  a legislative  proposal  to allow it to take  advantage  of its 
market  position.  While  competitive  bidding  is not  appropriate  for every  aspect  of the 
Medicare  program  or in every  geographic  location,  we believe  that  it can be  effective 
in many  instances,  including  the  procurement  of drugs.  Medicare  could  ask 
pharmacies  to compete  for business  to provide  Medicare  beneficiaries  with 
prescription  drugs.  All types  of pharmacies  could  compete  for Medicare  business, 
including  independents,  chains,  and  mail-order  pharmacies. 
Inherent  Reasonableness 
Since Medicares  guidelines  for calculating  reasonable  charges  for drugs  result  in 
excessive  allowances,  the  Secretary  can use her  inherent  reasonableness  authority  to 
set special  reasonable  charge  limits.  If this option  is selected,  however,  it will not  be 
effective  unless  the  Secretarys  authority  to reduce  inherently  unreasonable  payment 
levels is streamlined.  The  current  inherent  reasonableness  process  is resource 
intensive  and  time  consuming,  often  taking  two to four years  to implement.  Medicare 
faces  substantial  losses in potential  savings--certainly  in the  millions  of dollars--if 
reduced  drug  prices  cannot  be  placed  into  effect  quickly. 
Acquisition  Cost 
Medicare  could  base  the  payment  of drugs  on the  EAC.  The  DMERCS  currently 
have  this option;  however,  HCFA  has been  unsuccessful  in gathering  the  necessary 
data  to fully implement  it.  Once  the  problem  of gathering  the  necessary  data  is 
overcome,  the  use  of the  EAC  would  result  in lower  allowed  amounts.  A variation  of 
this option  is to use actual  rather  than  estimated  acquisition  costs. 
HCFA  COMMENTS 
The  HCFA  concurred  with our  recommendation  to reexamine  Medicares  drug 
reimbursement  methodologies  with  a goal of reducing  payments.  In exploring  new 
strategies  for changing  Medicares  payment  for prescription  drugs,  HCFA  has 
constructed  a framework  to calculate  drug  prices  centrally.  They  have  also  developed 
a crosswalk  between  Medicares  current  coding  system  and  the  NDCS to enable  claims 
processing  using the  NDC.  In addition,  HCFA  is examining  the  use  of competitive 
bidding  for nebulizers  and  associated  drugs  under  its demonstration  authority. 
10
 The  HCFA  agreed  with  our  concerns  about  invoking  the  inherent  reasonableness 
authority  and  stated  that  it appreciated  the  OIGS work  in this area.  The  HCFA  is 
currently  addressing  this issue through  the  regulatory  process.  The  full text  of HCFAS 
comments  are  presented  in Appendix  D. 
In a technical  comment,  HCFA  suggested  that  we review  the  proportion  of albuterol 
sulfate  actually  obtained  through  a pharmacy  as opposed  to a pharmacy  selling to a 
DME  company  who, in turn,  sells to the  Medicare  patient. 
OIG  RESPONSE 
We  support  HCFAS  efforts  to revise  its drug reimbursement  mechanisms  to more 
appropriately  pay for prescription  drugs  covered  under  the  Medicare  program.  We 
believe  revisions  to the  current  payment  methodologies  that  take  into  account  the 
actual  costs  of these  drugs would  provide  significant  savings to the  Medicare  program. 
We  discussed  directly  with HCFA  staff the  data  we had  available  in response  to their 
technical  comment. 
11
 APPENDIX  A

NONRESPONDENT  ANALYSIS 
An important  consideration  with respondent-based  research  is the  bias  that  maybe 
introduced  into  the  results  if nonrespondents  differ  from  respondents  in systematic 
ways.  We  achieved  an overall  response  rate  for claim-supporting  albuterol  sulfate 
invoices  of only 47 percent.  However,  as shown in the  table  below,  invoice  response 
rates  varied  widely by strata. 
INVOICE  RESPONSE  RATES  BY STRATA 
!1 
strata  Population  Sample  Achieved  Sample  Invoice 
size  size  Size(Invoices)  Response  Rates 
California  603  75  25  33% 
\  53qo 1
Florida  1789  75  40  I 
I 
Illinois  464  75  28  3770 
I I I  I 
New York  433  75  31  4170 
! 
Puerto Rico  866  55  46  84?Z0 
Texas  1075  75  36  48% 
Other States  6763  55  24  44?Z0 
TOTAL  11993  485  230  4770 
1 
In order  to test  for potential  bias  effects  that  suppliers  who  did not  provide  albuterol 
sulfate  invoices  may have  had  on our  invoice  price  estimates,  we conducted  an analysis 
utilizing  National  Supplier  Clearinghouse  (NSC)  supplier  profile  data.  The  NSC 
processes  all supplier  number  applications  and  maintains  files on these  suppliers. 
We inspected  NSC  data  profiling  the  nebulizer  drug  suppliers  who billed  Medicare  for 
the  485 albuterol  sulfate  claims  in our  sample.  We  reviewed  NSC  data  fields 
providing  information  on supplier  characteristics  such  as size and  scope  of business 
activity.  We  focused  our  analysis  on suppliers  possessing  assets  over  $100 million. 
The  Chi-square  statistic  was used  to test  for differences  between  suppliers  who 
submitted  invoices  and  suppliers  who  did not  submit  invoices  with respect  to assets. 
A-1
 CHI-SQUARE  FOR  SIZE  OF ASSETS 
Invoice  Invoice Not  Total  9Z0Invoice 
Submitted  Submitted  Submitted 
Assets >$100  5 (2%)  95 (41%)  100  5% 
million 
Assets <$100  214 (98%)  138 (59%)  352  61% 
million 
Overall  219  233  452  48% 
CHI-SQUARE  = 97.06@  Degrees of Freedom = 1 
Chi-square  results  are  presented  in the  table  above.  Analysis  indicates  that  our 
invoice  price  estimates  are  biased  with respect  to size of supplier  assets.  We  can 
conclude  that  there  is a relationship  in our  sample  between  invoice  submission  and 
size of assets  at the  99%  confidence  level. 
2A Chi-square  statistic  of 6.63 or higher  indicates  that  we can reject  the  null 
hypothesis  that  the  invoice  submissions  and  asset  sizes are  independent  at the  99 
percent  confidence  level. 
A-2  APPENDIX  B

COST  ESTIMATES  AND  CONFIDENCE  INTERVALS 
The  tables  below  contain  estimated  average  supplier  costs for albuterol  sulfate  overall 
and  by purchase  source.  Also provided  are  estimated  proportions  of invoices  by 
purchase  source  and  drug  type.  These  estimates  andtheir  corresponding  95 percent 
confidence  intervals  were  computed  using standard  statistical  formulas  for  a 
single-stage  stratified  random  sample. 
Supplier Cosb for Ailmterol  Sulfate 
Overall Mean  Estimate  95%  Confidence  Interval 
$0.194  $0.185-$0.204 
Supplier Cosfi by Invoice  l)pe 
Purchase Source  Mean  95%  Confidence  Interwd

Manufacturer  $0.139  $0.133-$0.145

Wholesaler  $0.203  $0.177-$0.229

Pharmacy  $0.227  $0.207-$0.246

Suppller Rdzase  Source 
Purchase Source  Proportion  95%  Confidence  Interval 
Manufacturer  32.25%  21.39%  - 43.11% 
II 
{1Wholesaler  ] 23.25%  I 13.63%  - 32.88% 
Pharmacy  44.50%  32.66%  - 56.34% 
T@e of Albuterol  Sulfate l+ovided 
Drug Tjrpe  Proportion  95%  Confidence  Interval

Generic  90.02%  82.57%  - 97.47%

Brand Name  5.9370  0- 12.10%

Compounded  4.05%  O - 8.62%

Other Costi 
Proportion  95%  Confidence  Interval 
Reported  Other  Costs  42.80%  32.54%  - 53.06% 
B-1
 APPENDIX  C

CALCULATION  OF  POTENTIAL  MEDICARE  SAVINGS 
Analysis  of claim-supporting  invoices  indicates  that  suppliers  are  paying  an average 
cost of $0.19 per  ml for  albuterol  sulfate. 
During  the  period  of our  review,  January  1994 through  February  1995, Medicare 
allowed  amounts  for albuterol  sulfate  ranged  from  $0.40 per  ml to  $0.43 per  ml. 
Medicare  allowances  for albuterol  sulfate,  based  on a median  of national  AWPS, 
totaled  over  $182 million  for this period.  If Medicare  allowances  for albuterol  sulfate 
had  been  based  on supplier  invoice  costs, however,  the  program  could  have  saved  an 
estimated  $94 million. 
This savings estimate  was calculated  by first determining  the  total  Medicare  allowance 
for  albuterol  sulfate  during  the  study period.  This figure  was obtained  from  HCFAS 
National  Claims  History  One  Percent  File.  Total  allowed  services  corresponding  to 
the  total  Medicare  allowance  were  calculated  conservatively  by dividing the  total 
allowance  by the  lowest  reimbursement  allowed  during  this period:  $0.40.  Total 
allowed  services  were  then  multiplied  by the  overall  average  supplier  cost of $0.194 
per  ml of albuterol  sulfate.  This estimated  total  Medicare  allowance  for  albuterol 
sulfate  was subtracted  from  the  actual  total  Medicare  allowance  to derive  potential 
savings.  The  calculation  steps  are  outlined  below. 
STEPl 
[[  Actual Total Allowance  I LowestReimbursementper ml  I  Estimated Total Servkes  II 
II 
$182,313,000  I  I $0.40  I  = 455,782,500  II 
STEP 2 
Estimated Total  Estimated Mean Supplier Price  Estimated Total Allowance 
Services  per ml 
455,782,500  x  $0.194  = $88,421,805 
($0.185 - $0.204)  ($84,319,763- $92,979,630) 
STEP 3 
Actual Total Allowance  Estimated Total Allowance  Potential Medieare Savings 
$182,313,000  -$88,421,805  = $93,891,195 
($84,319,763- $92,979,630)  ($89,333,370-$97,993,237) 
c-1
 APPENDIX  D 
AGENCY  COMMENTS 
D-1  .
>-
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,:..w  ,.j 
** Jg- Health  Care  financing  Administration 
~EPARTMENT  OF HEALTH & HUMAN  SERVICES
: 
: 
s 
3 
~+ The  Administrator 
+. >,,.,. Washington,  D.C.  20201 
DATE:  klAY-31996 
TO:  June Gibbs  Brown 
Administrator 
@ 
FROM:  Bruce  C. Vladec a 
_T 
Administrator  M  o-
SUBJECT:  Office  of Inspector  General  (OIG)  Working  Draft  Reports:  Appropriateness 
of Medicare  Prescription  Drug  Allowance(OEI-03  -94-OO42O),Supplier 
Acquisition  Costs  for Albuterol  Sulfate  (OEI-03-94-00393),  A 
Comparison  of Albuterol  Sulfate  Prices(OEI-03 -94-OO392) 
We reviewed  the subject  reports  concefig  Medicare  payments  for outpatient 
prescription  drugs.  Our detailed  comments  on the findings  and recommendations  are 
attached  for your  consideration.  Thank  you  for the oppotity  to review  and comment  on 
the reports. 
Attachment 
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PDIG 
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EXSEC

DATESEXT

3
 Health  Care Financing  Administration  (HCFA)  Comments  on

OffIce  of Inspector  General  (OIG) Working  Draft  Reports:

Medictie  Prescription  Drug Allowances,(OEI-03  -94-OO42O),

Supplier  Acquisition  Costs  for Albuterol  Sulfate.

(OEI-03-94-00393),  and A Comparison  of AIbuterol  Sulfate  Prices,

(OEI-03-94-00392)

OIG Recommendation 
HCFA  should  reexamine  its Medicare  drug reimbursement  methodologies,  with  a goal  of 
reducing  payments  as appropriate. 
HCFA  Response 
We concur.  HCFA  is exarninin g ways  to reduce  payments  for prescription  drugs  as 
follows: 
Discounted  Wholesale  Price 
Lnexploring  new  strategies  for changing  Medicares  payment  for prescription  drugs,  we 
have constructed  a framework  to calculate  drug prices  centrally.  Also,  we are developing 
a crosswalk  between  the current  HCFA  Common  Procedure  Coding  Systems  and the 
National  Drug  Code  (NDC)  to process  chims  using the NDC. 
Manufacturers  Rebates 
While  the Administration  included  a rebate  mechanism  in its proposed  Medicare  drug 
benefit  in the Health  Care  Reform  legislation,  it is not an option  that HCFA  is cwrently 
considering. 
Competitive  Bidding 
HCFA is exploring  the use of competitive  bidding  for nebulizers  and associate  drugs 
under its demonstration  authority. 
Lnherent Reasonableness 
We agree  and appreciate  OIGS work in this area.  HCFA is addressing  this issue  through 
the regulatory  process.  This process  has a comment  period;  therefore,  it requires  time  to 
implement.  Page 2 
Acquisition  Cost 
This option  involves  lowering  drug payments  by basing them on the estimated  acquisition 
cost.  A 1994 survey  attempt  was made  by HCFA to collect  the necessary  data  to fully 
implement  current  regulations.  The survey  was not approved  by the Office  of 
Management  and Budget  because  it was found to be too burdensome  to pursue  due  to the 
large number  of physicians  and drugs involved. 
Technical  Comment 
We suggest  OIG review  the proportion  of albuterol  actually  obtained  through  a pharmacy, 
as opposed  to a pharmacy  selling  to a durable  medical  equipment  provider  who in turn 
sells to the Medicare  patient.