Department of Health and Human Services 
OFFICE OF 
INSPECTOR GENERAL 
M P
EDICARE  AYMENTS FOR 
E N
NTERAL  UTRITION 
Inspector General 
February 2004 
OEI-03-02-00700  Office of Inspector General

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

Category I enteral nutrition formulas represented $201 million of the 
$311 million in Medicare Part B payments for all enteral nutrition 
formulas in 2001. The Office of Inspector General (OIG) compared the 
amount Medicare reimburses for Category I enteral nutrition formulas 
(procedure code B4150) to prices available to the supplier community. 
We obtained 177 individual contract prices for Category I formulas 
through 1 national wholesaler, 1 group purchasing organization, and 1 
supplier who negotiated contracts directly with 2 enteral nutrition 
formula manufacturers. We found that Medicares reimbursement 
amount for Category I formulas ($0.61 in 2001) exceeded median 
contract prices available to suppliers from the 3 sources reviewed by 70 
to 115 percent. Median contract prices ranged from $0.28 per unit to 
$0.36 per unit. Individual contract prices for Category I formulas varied 
from a low of $0.18 per unit to a high of $0.86 per unit, yet the majority 
(75 percent) of individual contract prices were lower than $0.42 per unit. 
OIG recommended that the Centers for Medicare & Medicaid Services 
(CMS) consider using its inherent reasonableness authority to reduce 
the Medicare reimbursement amount for Category I formulas. CMS 
agreed with our recommendation. 
OEI-03-02-00700  MEDICARE PAYMENTS FOR ENTERAL NUTRITION  i    E X E C U T I V E   S U M M A R Y

OBJECTIVE 
This inspection compared the amount Medicare reimburses for Category 
I enteral nutrition formulas (procedure code B4150) to prices available 
to the supplier community. 
BACKGROUND 
Medicare covers enteral nutrition therapy, commonly called tube 
feeding, for beneficiaries who cannot swallow due to a permanent 
medical problem or an impairment of long and indefinite duration. 
Medicare Part B coverage of enteral nutrition therapy is provided under 
the prosthetic device benefit for beneficiaries residing at home, or in a 
nursing facility when the stay is not covered by Medicare Part A. 
Medicare Part B payments for enteral nutrition formulas totaled more 
than $311 million in calendar year 2001. 
Medicare groups enteral nutrition formula products into seven codes, 
based on their composition. Category I formulas represented by code 
B4150 accounted for $201 million of the $311 million in Medicare Part B 
payments for all enteral nutrition formulas in 2001. Medicare 
reimbursement for Category I formulas was $0.61 per 100 calories of 
formula in 2001. 
While a wide variety of enteral nutrition formulas meets the criteria for 
inclusion in Category I, Medicare does not collect any information on 
the brands and types of formulas that are actually provided to Medicare 
beneficiaries when suppliers submit Category I formula claims for 
reimbursement. 
Suppliers may purchase enteral nutrition formulas from sources such as 
wholesalers, group purchasing organizations, and directly from 
manufacturers. Prices charged to individual suppliers are often based 
on the volume of product purchased. In order to compare Medicares 
reimbursement amount to prices available to suppliers, we obtained 
contract prices for Category I enteral nutrition formulas through one 
national wholesaler and through one group purchasing organization. 
We also obtained information on one suppliers contract prices that were 
negotiated directly with two enteral nutrition formula manufacturers. 
We did not collect data from suppliers regarding any additional supplier 
costs related to furnishing enteral nutrition formula to Medicare 
OEI-03-02-00700  MEDICARE PAYMENTS FOR ENTERAL NUTRITION  ii  E X E C U T I V E   S U M M A R Y  
beneficiaries. Therefore, the median contract prices do not include 
these associated supplier costs. 
To determine how much Medicare and its beneficiaries could save if the 
reimbursement amount for Category I formulas were set at prices 
available to suppliers, we calculated percentage differences between the 
medians of contract prices for Category I formulas and the Medicare 
reimbursement amount in 2001. We applied these percentage 
differences to 2001 Medicare Part B payments for Category I formulas 
in order to compute potential program savings. 
Since completion of our evaluation, the Medicare Prescription Drug, 
Improvement, and Modernization Act of 2003 (the Act) was signed into 
law. In part, the Act directs the Secretary of the Department of Health 
and Human Services to establish a program for competitive acquisition 
of durable medical equipment and supplies. This program has yet to be 
developed and implemented; however, it could reform how Medicare 
reimburses for enteral nutrition, equipment and supplies. 
FINDINGS 
Medicares reimbursement amount for Category I enteral nutrition 
formulas exceeded the median of purchase prices reviewed by as 
much as 115 percent. An analysis of 177 contract prices available to 
suppliers from the 3 sources reviewed indicated that the Medicare 
payment amount for Category I formulas exceeded median contract 
prices by 70 to 115 percent. The lowest median contract price for 
Category I formulas was obtained by the supplier who negotiated prices 
directly with manufacturers. If Medicares payment amount for these 
formulas had been set at the median of purchase prices reviewed, we 
estimate that the program and its beneficiaries could have saved over 
$82 million in calendar year 2001. 
Individual contract prices for Category I formulas varied widely, from a 
low of $0.18 per unit to a high of $0.86 per unit. The majority (75 
percent) of individual contract prices were lower than $0.42 per unit. At 
present, Medicare is unable to determine whether most beneficiaries are 
using the lower-priced or higher-priced products because the program 
does not collect any specific information on the products that are 
provided to beneficiaries when suppliers submit claims for Category I 
formulas. 
OEI-03-02-00700  MEDICARE PAYMENTS FOR ENTERAL NUTRITION  iii  E X E C U T I V E   S U M M A R Y  
RECOMMENDATION 
The findings of this report suggest that the supplier community obtains 
Category I enteral nutrition formula products at prices that are lower 
than Medicares reimbursement amount. If Medicares reimbursement 
amount had been based more closely on these prices, the program and 
its beneficiaries could have realized savings. 
The Centers for Medicare & Medicaid Services (CMS) had attempted to 
reduce Medicare payments for enteral nutrition formulas through the 
use of its inherent reasonableness authority. However, Congress 
suspended the use of the inherent reasonableness authority in the 1999 
Medicare, Medicaid, and SCHIP Balanced Budget Refinement Act 
before payment reductions could be implemented. In December 2002, 
CMS published an interim final rule on the use of inherent 
reasonableness authority. This rule, which became effective in 
February 2003, allows CMS contractors to raise or lower Medicare 
payment amounts for medical equipment and supplies by 15 percent in 
any given year without a formal rulemaking process. 
We believe that continued CMS attention to Medicare Part B payments 
for Category I enteral nutrition formulas is warranted. Since CMS now 
has the authority to implement inherent reasonableness reductions, we 
recommend that CMS: 
Consider using its inherent reasonableness authority to reduce the 
Medicare reimbursement amount for Category I enteral nutrition formulas. 
CMS may want to begin an inherent reasonableness review by collecting 
information from Medicare suppliers to identify the specific Category I 
enteral nutrition formulas that suppliers provide to Medicare 
beneficiaries. CMS may also want to collect information from suppliers 
to determine suppliers purchase costs for the specific formulas used by 
Medicare beneficiaries. 
CMS agreed with our recommendation that they consider using 
inherent reasonableness authority to reduce the reimbursement amount 
for Category I formulas. CMS noted that it will not be able to initiate 
inherent reasonableness reviews until its contractor develops written 
procedures for conducting these reviews according to the statute and 
regulation. 
OEI-03-02-00700  MEDICARE PAYMENTS FOR ENTERAL NUTRITION  iv    T A B L E   O F   C O N T E N T S

A B S T R A C T  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . . . . .   i

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

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

F I N D I N G S  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . . . . . .  7

Medicare reimbursement for Category I formulas

exceeded median purchase price........................................................7

R E C O M M E N D A T I O N  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . .  10

A P P E N D I C E S. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . .   11

A :  Calculation of Potential Savings for

Category I Enteral Formulas ..................................................... 11

B: Centers for Medicare & Medicaid Services Comments ............. 12

A C K N O W L E D G M E N T S  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . .  14
   I N T R O D U C T I O N

OBJECTIVE 
This inspection compared the amount Medicare reimburses for Category 
I enteral nutrition formulas (procedure code B4150) to prices available 
to the supplier community. 
BACKGROUND 
Medicare Coverage of Enteral Nutrition Therapy 
Medicare covers enteral nutrition therapy, commonly called tube 
feeding, for beneficiaries who cannot swallow due to a permanent 
medical problem or an impairment of long and indefinite duration.1 
Medicare Part B coverage of enteral nutrition therapy is provided under 
the prosthetic device benefit for beneficiaries residing at home, or in a 
nursing facility when the stay is not covered by Medicare Part A. 
Enteral nutrition formulas are available in liquid or powder form (which 
is reconstituted with water). The liquid solution is administered 
through a tube, which is threaded through the patients nose or a 
surgical opening that leads directly to the stomach or intestine. Liquid 
enteral nutrition formulas are packaged in cans and pre-filled sterile 
containers. A canned formula is emptied into a plastic bag or container, 
which is then connected to tubing and hung from an IV pole for 
administration. Unlike cans, the pre-filled sterile systems do not 
require transfer of formula from one container to another. A pre-filled 
container is spiked with tubing and then hung from an IV pole for 
administration. 
Medicare groups enteral nutrition formula products into seven classes, 
based on their composition. Products falling within these classes are 
identified by one of seven Healthcare Common Procedure Codes 
(HCPCs) for reimbursement purposes. A wide variety of enteral 
nutrition formulas are grouped under Category I, including Boost, 
Ensure, Isosource, and Nutren. However, Medicare carriers do not 
collect any information on the manufacturer, brand name, type, and size 
of packaging of the individual enteral nutrition formulas that they cover 
under the Category I procedure code. 
1 Centers for Medicare & Medicaid Services, Medicare Coverage Issues Manual, 
Section 65-10. 
OEI-03-02-00700  MEDICARE PAYMENTS FOR ENTERAL NUTRITION  1  I N T R O D U C T I O N  
Medicare Part B Payments for Enteral Nutrition Formulas 
Medicare Part B payments for enteral nutrition formulas totaled more 
than $311 million in 2001. Category I enteral nutrition formulas 
represented by code B4150 (defined in Table 1) accounted for $201 
million, or almost two-thirds, of total formula allowances. Code B4150 
ranked ninth in a listing of durable medical equipment and supply codes 
with the highest Medicare allowances in the last quarter of 2001.2 
Table 1. Procedure Code B4150 
HCPC  Code Description  2001 Medicare 
Allowances 
Enteral formulae; Category I; semi-synthetic intact 
protein/protein isolates, administered through an 
B4150  $201,066,767 
enteral feeding tube, 100 calories = 1 unit 
Sources: American Medical Association, HCPCS 2002 publication; CMS National Claims History File 
Part B claims for enteral nutrition formulas are processed and paid by 
four durable medical equipment regional carriers (DMERCs). Medicare 
carriers use national fee schedule amounts to reimburse claims for 
enteral nutrition formulas. 
Medicare reimbursement for enteral nutrition formulas is based on the 
number of calories of formula provided to a patient, not the volume of 
the product. Reimbursement amounts are for one unit, defined as 100 
calories, of formula. For example, if a patient is prescribed 1,000 
calories of formula per day, Medicare reimbursement is based on 10 
units of formula per day. Medicare reimbursement for Category I 
formulas was $0.61 per unit in 2001. 
Efforts to Reduce Medicare Payments for Enteral Nutrition Formulas 
In 1998, DMERCs proposed a 16 percent reduction in Medicares 
allowance for Category I formulas using the Centers for Medicare & 
Medicaid Servicess (CMSs) revised inherent reasonableness authority. 
This authority allowed DMERCs to adjust Medicare payments up or 
down by a maximum of 15 percent per year for medical equipment and 
supplies without going through a formal rulemaking process. An 
incremental approach would have resulted in a 15 percent reduction in 
the first year of implementation and an additional 1 percent reduction 
2 The SADMERC Abstract, Volume VIII, Palmetto GBA, June 14, 2002 (Internal CMS 
document). 
OEI-03-02-00700  MEDICARE PAYMENTS FOR ENTERAL NUTRITION  2  I N T R O D U C T I O N  
in the second year. The proposed reductions were based on DMERCs 
surveys of retail prices for items that they suspected had excessive 
Medicare payment rates,3 including Category I formulas. However, 
Congress suspended the use of the inherent reasonableness authority in 
the 1999 Medicare, Medicaid, and SCHIP Balanced Budget Refinement 
Act before payment reductions could be implemented. This provision 
required the U.S. General Accounting Office (GAO) to complete a study 
of the potential effects of using inherent reasonableness measures, and 
required CMS to issue a final rule that responded to the GAO report 
before CMS could use this authority to reduce Medicare payments. 
The GAO report (issued in July 2000) indicated that Medicare 
allowances for some items of durable medical equipment may be 
substantially higher than the prices available in retail outlets. 
However, GAO questioned the DMERCs retail survey results for 
enteral nutrition formulas, noting, the DMERCs did not survey the 
types of enteral nutrition formulas and the packaging systems 
considered most appropriate and generally used for tube feeding.4 
GAO concluded that retail survey data alone did not provide sufficient 
evidence to adjust the Medicare allowance amount for Category I 
formulas. CMS published an interim final rule on the use of inherent 
reasonableness authority in December 2002. This rule, which became 
effective in February 2003, limits payment adjustments to a 15 percent 
increase or decrease in any given year and also states that proposed 
payment adjustments of less than 15 percent do not provide "a sufficient 
basis" for the use of this inherent reasonableness authority. 
Enteral nutrition formulas and associated equipment and supplies were 
also included in the first round of a CMS competitive bidding 
demonstration in Polk County, Florida from October 1999 through 
September 2001. This project aimed to demonstrate how competition 
among suppliers could reduce Medicare payments for some medical 
equipment and supplies. Competitive bidding demonstration 
allowances for six of the seven enteral formula HCPCs were an average 
of 9.1 percent lower than fee schedule rates. The demonstration 
allowance for Category I formulas was $0.56  an amount that is 8.2 
percent lower than the national fee schedule amount. 
3 U.S. General Accounting Office, Use of Revised Inherent Reasonableness Process 
Generally Appropriate, GAO/HEHS-00-79, July 2000, p.4. 
4 Ibid, p.21 
OEI-03-02-00700  MEDICARE PAYMENTS FOR ENTERAL NUTRITION  3  I N T R O D U C T I O N  
Medicare Prescription Drug, Improvement, and Modernization Act of 2003 
Since completion of our evaluation, the Medicare Prescription Drug, 
Improvement, and Modernization Act of 2003 (the Act) was signed into 
law (Public Law 108-173). In part, the Act directs the Secretary of the 
Department of Health and Human Services (HHS) to establish a 
program for competitive acquisition of durable medical equipment and 
supplies. This program, which will be phased in beginning in 2007, will 
replace fee schedules for covered items. The HHS Secretary is 
authorized to exempt items and services where competitive acquisition 
would not likely result in significant savings. Because this program has 
yet to be developed and implemented, it is premature to speculate about 
its impact on reimbursement for enteral nutrition and supplies; 
however, it bears noting that competitive acquisition could reform how 
Medicare reimburses for enteral nutrition, equipment, and supplies. 
Supplier Acquisition Costs for Enteral Nutrition Formulas 
Suppliers may purchase enteral nutrition formulas from sources such as 
wholesalers, group purchasing organizations, and directly from 
manufacturers. Wholesalers purchase large quantities of medical 
equipment and supplies at discounted rates from manufacturers and 
sell these products to suppliers. A group purchasing organization uses 
the combined buying power of its members to negotiate advantageous 
prices for medical equipment and supplies from manufacturers. 
Members of the group purchasing organization then purchase the 
products they need from the manufacturers or from wholesalers that 
accept the negotiated prices. Suppliers may also obtain enteral 
nutrition formulas directly from manufacturers. Prices charged to 
individual suppliers are often based on the volume of the product 
purchased. 
METHODOLOGY 
Sources of Contract Prices for Enteral Nutrition Formulas 
We obtained contract prices for Category I enteral nutrition formula 
products offered through a national wholesaler and a group purchasing 
organization. These contracts were with four enteral nutrition formula 
manufacturers  Mead Johnson, Nestle, Novartis, and Ross. The 
wholesaler is one of the largest distributors of medical and surgical 
products in the United States and serves more than 85,000 customers. 
The group purchasing organization serves over 2,300 non-hospital 
health care providers across the Nation. We also obtained information 
OEI-03-02-00700  MEDICARE PAYMENTS FOR ENTERAL NUTRITION  4  I N T R O D U C T I O N  
on one suppliers contract prices that the supplier negotiated directly 
with two enteral formula manufacturers  Novartis and Ross. 
The contracts included prices for many different types of enteral 
nutrition formulas, including liquid formulas packaged in 250 milliliter 
(mL) and 1000 mL cans, 1000 mL and 1500 mL pre-filled containers, 
and 237 mL Tetra Brik Paks. Contracts also included prices for 
powdered formulas packaged in 1-pound and 4.5-pound cans. 
Comparing Contract Prices to Medicare Payment Amount 
The 177 individual contract prices reviewed were listed as per case or 
per unit prices. Medicares reimbursement amount for Category I 
enteral nutrition products is for 100 calories of formula. As shown in 
the example in Table 2 below, in order to compare contract prices to 
Medicares reimbursement amount, we converted each contract price 
into a price per 100 calories of formula. We researched manufacturer 
literature for each enteral nutrition formula product to determine the 
number of calories in a case or unit of product. We determined the price 
per calorie by dividing the contract price of the case or unit of product 
by the number of calories in the case or unit. We multiplied the 
products price per calorie by 100 to determine the contract price per 100 
calories. 
Table 2. Calculation of Contract Price per 100 Calories 
A  B  C  D  E 
Calories  Contract Price 
Contract Price  Cans  Calories 
per Case  per 100 Calories 
per Case  per Case  per Can 
B*C  (A/D)*100 
$19.00  24  300  7200  $0.26 
Source: Review of Contract Prices, Office of Evaluation and Inspections, 2003. 
Note: Currency figures in the table have been rounded. 
Calculating Potential Medicare Savings 
We calculated how much Medicare and its beneficiaries would save if 
the reimbursement amount for Category I formulas were set at the 
median of purchase prices reviewed. We determined the percentage 
difference in prices for each source by subtracting the median of 
contract prices for Category I formulas from Medicares national 
reimbursement amount in 2001 ($0.61) and then dividing this number 
by Medicares reimbursement amount. We multiplied these percentage 
differences by total Medicare Part B payments for Category I formulas 
in 2001 in order to compute potential program savings. Medicare 
allowance data were obtained from CMSs National Claims History File. 
OEI-03-02-00700  MEDICARE PAYMENTS FOR ENTERAL NUTRITION  5  I N T R O D U C T I O N  
The data used to calculate potential Medicare and beneficiary savings 
are presented in Appendix A. 
Limitations of Contract Price Data 
We did not collect data from suppliers regarding any additional supplier 
costs related to furnishing enteral nutrition formula to Medicare 
beneficiaries. Therefore, the median contract prices do not include 
these associated supplier costs. The estimates of potential program 
savings presented in the findings of this report would be lower if median 
contract prices had included associated supplier costs. 
OEI-03-02-00700  MEDICARE PAYMENTS FOR ENTERAL NUTRITION  6  0 F I N D I N G S  
  
Medicares reimbursement amount for     An analysis of contract prices 
Category I enteral nutrition formulas exceeded  available to suppliers from one 
wholesaler and one group 
the median of purchase prices reviewed by as 
purchasing organization, and 
much as 115 percent. 
contract prices negotiated by one 
supplier directly with enteral 
nutrition formula manufacturers indicated that the Medicare payment 
amount for Category I formulas exceeded median contract prices by 70 
to 115 percent.  Of the three sources reviewed, the supplier who 
negotiated prices directly with manufacturers obtained the lowest 
median contract price for Category I formulas. 
Individual contract prices for Category I formulas varied widely, from a 
low of $0.18 per unit to a high of $0.86 per unit.  Contract prices for only 
three products exceeded the Medicare reimbursement amount of $0.61 
per unit.  Seventy-five percent of individual contract prices were lower 
than $0.42 per unit.  If Medicares payment amount for these formulas 
had been set at the median of purchase prices reviewed, we estimate 
that the program and its beneficiaries could have saved over $82 million 
in calendar year 2001.  The actual savings to Medicare and its 
beneficiaries would likely be lower than the estimate of potential 
savings, since this estimate does not account for any additional supplier 
costs related to enteral nutrition formulas.  Table 3 presents a summary 
of our comparison of contract prices to Medicares payment amount and 
our estimates of potential program savings. 
 
Table 3. Comparison of Contract Prices to Medicare Payment Amount
Medicare 
Median Range of Reimbursement  Potential Annual 
Source Price Prices Compared to Median  Medicare and 
Contract Price Source Per Unit Per Unit   Source Price Beneficiary Savings
Medicare National Fee Schedule $0.61 NA NA NA
Group Purchasing Organization $0.36 $0.18 to $0.81 71% Higher $83,591,036
Wholesaler $0.34 $0.18 to $0.86 77% Higher $87,531,798
Supplier Contracts with Manufacturers
30+ cases of product/month $0.28 $0.19 to $0.57 115% Higher $107,587,201
10-29 cases of product/month $0.29 $0.19 to $0.60 108% Higher $104,225,101
1-9 cases of product/month $0.36 $0.19 to $0.72 70% Higher $82,898,839
Source: Review of Contract Prices, Office of Evaluation and Inspections, 2003.
Note: All figures in the table have been rounded.
  OEI-03-02-00700  MEDICARE PAYMENTS FOR ENTERAL NUTRITION  7  FF II NN DD II NN GG SS  
Members of one group purchasing organization were able to obtain 
Category I formulas for a median price of $0.36 per unit. 
The group purchasing organization contracts we reviewed contained 
prices for 88 individual Category I enteral nutrition formulas. We found 
that suppliers who are members of this group purchasing organization 
were able to purchase Category I formulas for a median contract price of 
$0.36 per unit. 
The group purchasing organizations contract prices for 86 of 88 
individual formula products ranged from $0.18 per unit for Meritene 
powdered formula to $0.48 per unit for Resource Just for Kids with 
Fiber  a pediatric formula packaged in Tetra Brik Paks. Medicares 
reimbursement amount was 26 percent to 231 percent higher than 
individual product prices available to the group purchasing organization 
members. For two products, contract prices exceeded Medicares 
reimbursement amount. Portagen powdered formula was priced at 
$0.81 per unit; and Introlite  a half-calorie liquid formula used to 
introduce tube feeding  was priced at $0.74 per unit. 
Suppliers were able to obtain Category I formulas from one wholesaler 
for a median price of $0.34 per unit. 
We arrayed wholesale contract prices for 41 individual Category I 
enteral nutrition formulas and found that suppliers were able to obtain 
these products for a median contract price of $0.34 per unit, compared 
to the Medicare payment amount of $0.61 per unit. 
The wholesalers contract prices for 40 of 41 individual formula products 
ranged from $0.18 per unit for a standard, canned, tube-feeding formula 
called Isosource to $0.49 per unit for Glytrol  a formula for patients 
with hyperglycemia  in pre-filled sterile containers. Medicares 
payment amount of $0.61 per unit was 25 percent to 235 percent higher 
than these wholesale contract prices. At $0.86 per unit, a specialty 
powdered formula called Portagen was the only product with a 
wholesale contract price that exceeded the Medicare payment amount. 
One supplier was able to purchase Category I formulas for a median 
price of as low as $0.28 per unit by negotiating directly with formula 
manufacturers. 
We reviewed contracts for enteral nutrition products that one supplier 
negotiated directly with two formula manufacturers. Rather than 
listing a single contract price, one of the two manufacturers provided 
the supplier with three contract prices for each product. The three 
contract prices were based on the number of cases of the product the 
OEI-03-02-00700  MEDICARE PAYMENTS FOR ENTERAL NUTRITION  8  FF II NN DD II NN GG SS  
supplier ordered in 1 month. The larger the volume of formula 
purchased per month, the lower the per unit contract price (see Table 3). 
If the supplier purchased one to nine cases of a particular Category I 
formula each month, it paid a median price of $0.36 per unit. For 10 to 
29 cases each month, the supplier paid $0.29 per unit. For 30 or more 
cases of a Category I formula each month, the supplier paid $0.28 per 
unit. 
At 1 to 9 cases per month, manufacturers contract prices for 46 of 48 
individual formula products ranged from $0.19 per unit for Meritene 
powdered formula to $0.58 per unit for a canned pediatric product called 
Pediasure Enteral Formula. Medicares reimbursement amount was 6 
percent to 218 percent higher than these individual product prices. 
Contract prices for two products  Introlite and Pediasure Enteral 
Formula with Fiber  exceeded Medicares reimbursement amount. At 
10 to 29 cases per month and 30 or more cases per month, all of the 
manufacturers contract prices were lower than the Medicare payment 
amount of $0.61 per unit. 
OEI-03-02-00700  MEDICARE PAYMENTS FOR ENTERAL NUTRITION  9    R E C O M M E N D A T I O N

RECOMMENDATION 
The findings of this report suggest that the supplier community obtains 
Category I enteral nutrition formula products at prices that are lower 
than Medicares reimbursement amount. If Medicares reimbursement 
amount had been based more closely on these prices, the program and 
its beneficiaries could have realized savings. 
CMS had attempted to reduce Medicare payments for enteral nutrition 
formulas through the use of its inherent reasonableness authority. 
However, Congress suspended the use of the inherent reasonableness 
authority in the 1999 Medicare, Medicaid, and SCHIP Balanced Budget 
Refinement Act before payment reductions could be implemented. In 
December 2002, CMS published an interim final rule on the use of 
inherent reasonableness authority. This rule, which became effective in 
February 2003, allows CMS contractors to raise or lower Medicare 
payment amounts for medical equipment and supplies by 15 percent in 
any given year without a formal rulemaking process. 
We believe that continued CMS attention to Medicare Part B payments 
for Category I enteral nutrition formulas is warranted. Since CMS now 
has the authority to implement inherent reasonableness reductions, we 
recommend that CMS: 
Consider using its inherent reasonableness authority to reduce the 
Medicare reimbursement amount for Category I enteral nutrition formulas. 
CMS may want to begin an inherent reasonableness review by collecting 
information from Medicare suppliers to identify the specific Category I 
enteral nutrition formulas that suppliers provide to Medicare 
beneficiaries. CMS may also want to collect information from suppliers 
to determine suppliers purchase costs for the specific formulas used by 
Medicare beneficiaries. 
Agency Comments 
CMS agreed with our recommendation that it consider using inherent 
reasonableness authority to reduce the reimbursement amount for 
Category I formulas. CMS noted that it will not be able to initiate 
inherent reasonableness reviews until its contractor develops written 
procedures for conducting these reviews according to the statute and 
regulation. 
OEI-03-02-00700  MEDICARE PAYMENTS FOR ENTERAL NUTRITION  10  A P P E N D I X ~ A

Calculation of Potential Savings for Category I Enteral Nutrition Formulas 
1.	 To determine percentage differences between contract prices for Category I enteral 
nutrition formulas and Medicares reimbursement amount, we subtracted the 
median price for each source from the Medicare reimbursement amount. We then 
divided this number by the Medicare reimbursement amount. 
2.	 To calculate potential Medicare and beneficiary savings by price source, we 
multiplied total Medicare Part B allowances ($201,066,767) for Category I enteral 
nutrition formulas in 2001 by the percentage differences. 
Calculation of Potential Savings for Category I Enteral Nutrition Formulas 
A  B  C  D  E  F 
2001 Medicare 
Median  Median Source Price  Part B  Potential Annual 
Source Price  Medicare  Compared to Medicare  Allowances for  Medicare and 
per 100  Reimbursement  Reimbursement  Category I  Beneficiary Savings 
Contract Price Source  Calories  per 100 Calories  ((C-B)/C)*100  Formulas  D*E 
Group Purchasing Organization  $0.36  $0.61  41.57% Lower  $201,066,767  $83,591,036 
Wholesaler  $0.34  $0.61  43.53% Lower  $201,066,767  $87,531,798 
Supplier Contracts with Manufacturers 
30+ cases of product per month  $0.28  $0.61  53.51% Lower  $201,066,767  $107,587,201 
10-29 cases of product per month  $0.29  $0.61  51.84% Lower  $201,066,767  $104,225,101 
1-9 cases of product per month  $0.36  $0.61  41.23% Lower  $201,066,767  $82,898,839 
Sources: Review of Contract Prices, Office of Evaluation and Inspections, 2003; CMS's National Claims History File 
Note: Median source prices, percentages, and potential savings amounts in the table have been rounded. 
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Centers for Medicare & Medicaid Services Comments 
OEI-03-02-00700  MEDICARE PAYMENTS FOR ENTERAL NUTRITION  12
 A P P E N D I X ~ B  
OEI-03-02-00700  MEDICARE PAYMENTS FOR ENTERAL NUTRITION  13
  A C K N O W L E D G M E N T S

This report was prepared under the direction of Robert A. Vito, Regional 
Inspector General for Evaluation and Inspections in the Philadelphia 
Regional Office, and Linda M. Ragone, Deputy Regional Inspector 
General. Other principal Office of Evaluation and Inspections staff who 
contributed include: 
Amy Sernyak, Project Leader 
Tanaz Dutia, Program Analyst 
Stephanie Lattin London, Program Specialist 
OEI-03-02-00700  MEDICARE PAYMENTS FOR ENTERAL NUTRITION  14