I 
Department  of Health  and Human  Services 
OFFICE OF 
INSPECTOR GENERAL 
A  COMPARISON  OF 
ALBUTEROL  SULFATE  PRICES  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 sewed 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 
Linda M. Ragone, Project Leader  Mary Beth Clarke, Program Specialist

Robert  Katz, Program Analyst

Nancy Molyneaux, Program Analyst

Cynthia Hansford, Program Assistant

To obtain copies of this repo~  please call the PhiladelphiaRegional Office at (8(M))531-9562.  Department  of Health  and Human  Services 
OFFICE OF 
INSPECTOR GENERAL 
A COMPARISON  OF

ALBUTEROL  SULFATE  PRICES

@ sERVICES 
$$  %--

$

GIBBS  BROWN 
$  JUNE 
~  Inspector  General 
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+++$
 JUNE 1996 
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> 
0EI-03-94-O0392  EXECUTIVE  SUMMARY 
PURPOSE 
To  assess  the  appropriateness  of the  amount  Medicare  allows for albuterol  sulfate,  a 
prescription  inhalation  drug  used  innebulizers. 
BACKGROUND 
A nebulizer  is a type  of durable  medical  equipment  (DME)  through  which

prescription  drugs  are  administered  for inhalation  therapy.  Patients  with  conditions

such  as asthma  or emphysema  may require  treatment  that  involves  the  use  of a

nebulizer.  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.

One  prescription  drug  that  is commonly  used  for inhalation  therapy  with  nebulizers  is

albuterol  sulfate  (0.083%  concentration).  Between  January  of 1994 and  February  of

1995, Medicare  allowed  $182 million  for this drug,  68 percent  of the  $269 million  in

total  Medicare  allowances  for  all nebulizer  drugs.

We  surveyed  pharmaceutical  buying  groups,  mail-order  pharmacies,  and  retail

pharmacy  stores  and  compared  their  prices  for generic  versions  of albuterol  sulfate  to

the  amount  that  Medicare  allows.

FINDINGS 
Many phamacies surveyedchargedcustornemlessfor genericalbuterolsu@atethan 
Mkdicarealk9wed 
A customer  would  pay  less than  Medicare  for albuterol  sulfate  in more  than  half  of 
the  retail  stores  surveyed  and  in all of the  mail-order  pharmacies  contacted.  Fifty-five 
percent  of retail  pharmacy  stores  (60 of 109) charged  less for  generic  versions  of 
albuterol  sulfate  than  the  $0.43 per  milliliter  that  Medicare  allowed.  Four  mail-order 
pharmacies  charged  between  2 and  12 percent  less than  Medicare  reimburses,  and  one 
charged  53 percent  less. 
AU jive buyinggroupsSLUVeyehdadnegotiatedpricessubstantial~lowerthunMedicare 
reimbumementfor albuterolsulfate. 
The  generic  drug  prices  the  five buying  groups  negotiated  ranged  from  56 to 70 
percent  less than  the  $0.43 Medicare  allowed  per  milliliter  of albuterol  sulfate.  The 
pharmacies  that  are  members  of these  buying groups  purchase  albuterol  sulfate  at 
these  lower  prices.  Therefore,  the  average  wholesale  price  used  to determine 
i  Medicares  allowance  for albuterol  sulfate  was significantly  higher  than  the  wholesale 
price  paid  by thousands  of the  buying groups  member  pharmacies. 
RECOMMENDATION 
We  believe  the  findings  of this report  complement  and  reinforce  those  of our  earlier 
report,  Medicare  Payments  for  Nebulizer  Drugs,  by providing  evidence  that  Medicares 
allowance  for nebulizer  drugs  may be  inappropriately  high.  In the  earlier  report,  we 
found  that  Medicaid  State  agencies  were  reimbursing  less for albuterol  sulfate  than 
Medicare.  We  have  provided  evidence  in this report  that  mail-order  pharmacies  and 
many  retail  pharmacy  stores  charge  customers  less for generic  versions  of albuterol 
sulfate  than  Medicare  allows.  Currently,  the  DMERCS  are  utilizing  the  median  of 
average  wholesale  prices  for generic  versions  of albuterol  sulfate  to determine  the 
allowance  amount.  We believe  using the  median  of the  published  average  wholesale 
prices  does  not  reflect  the  actual  wholesale  pricing  of albuterol  sulfate  that  is occurring 
in the  marketplace. 
We  therefore  continue  to believe  that  HCFA  should reexamine  its Medicare  drug 
reimbursement  methodologies  with the goal of reducing payments  for prescription 
drugs, as we recommended  in our  earlier  report. 
AGENCY  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  A. 
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. 
ii  TABLE  OF  CONTENTS

PAGE 
EXECUTIVESUMMARY  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ..i

INTRODUCIION  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ...1

FINDINGS  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ...4


Pharmacies  prices  were  less than  Medicare  allowances  . . . . . . . . . . . . . . . . . . . 4


Buying groups  negotiated  lower  prices  than  Medicare  allowed  . . . . . . . . . . . . .  5

RECOMMENDATION  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  7

APPENDIX  A  Agency  Comments  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ..A-l
 INTRODUCTION

PURPOSE 
To  assess  the  appropriateness  of the  amount  Medicare  allows for albuterol  sulfate,  a 
prescription  inhalation  drug  used  in nebulizers. 
BACKGROUND 
A nebulizer  is a type  of durable  medical  equipment  (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.  Patients  with  conditions  such  as asthma  or emphysema  may require

treatment  that  involves  the  use  of a nebulizer.  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.

One  prescription  drug  that  is commonly  used  for inhalation  therapy  with nebulizers  is

albuterol  sulfate  (0.083%  concentration).  Between  January  of 1994 and  February  of

1995, Medicare  allowed  $182 million  for  albuterol  sulfate  (code  J7620).  This

represents  68 percent  of the  $269 million  in total  Medicare  allowances  for all

nebulizer  drugs.  Medicare  allowances  for  all nebulizer  drugs  have  increased  more

than  200 percent  between  1992 and  1994.

Paymentof NebuiherDrugsin theMedicarel%ogram 
Title  XVIII  of the  Social  Security  Act  authorizes  coverage  of DME  under  Medicare 
Part  B.  Section  2100.5 of the  Medicare  Carriers  Manual  specifies  instances  involving 
covered  uses  of outpatient  prescription  drugs,  including  drugs  used  in conjunction  with 
DME.  The  Manual  specifies  that  drugs  are  covered  under  Medicare  Part  B as long as 
the  drugs  are  necessary  for the  effective  use  of the  DME.  This  includes  inhalation 
drugs  used  in nebulizers. 
According  to 42 Code  of Federal  Regulations  405.517, Medicare  computes  an  allowed 
amount  for  drugs  based  on the  lower  of the  Estimated  Acquisition  Cost  (EAC)  or the 
national  Average  Wholesale  Price  (AWP).  The  allowed  amount  is the  price  that 
Medicare  and  its beneficiaries  pay  a drug  supplier.  If a drug  has multiple  sources  (as 
does  albuterol  sulfate),  the  price  is based  on the  lower  of the  EAC  or the  median  of 
the  national  AWP  for all generic  sources.  The  EAC  is determined  based  on surveys 
of the  actual  invoice  prices  paid  for the  drug.  The  AWP  is determined  through  Z7ze 
Red  Book  or similar  price  listings used  in the  pharmaceutical  industry. 
The  Health  Care  Financing  Administration  (HCFA)  designated  four  Durable  Medical 
Equipment  Regional  Carriers  (DMERCS)  to process  all claims  for durable  medical 
1
 equipment,  prosthetics,  orthotics,  and  supplies,  including  nebulizer  drugs.  Effective 
October  1, 1993, the  DMERCS  replaced  the  local  carriers  which  had  previously 
processed  these  claims.  Each  DMERC  is responsible  for determining  the  pricing  for 
albuterol  sulfate  in their  regions  based  on the  computation  stated  in the  regulations. 
RelatedWorkby the ~ce  of IhspectorGeneral 
In a recent  report  entitled,  Medicare  Payments  for  Nebulizer  Drugs  (OEI-03-94-O0390), 
the  OIG  found  that  Medicaid  reimbursed  albuterol  sulfate  and  other  nebulizer  drugs 
at significantly  lower  prices  than  Medicare.  For  albuterol  sulfate,  Medicare  and  its 
beneficiaries  paid  $34 million  more  in 17 States  than  the  amount  that  Medicaid  would 
have  paid.  In a related  report,  Suppliers  Acquzkition  Costs for Albuterol  Su~ate 
(OEI-03-94-O0393),  Medicares  allowances  for albuterol  sulfate  were  found  to 
substantially  exceed  suppliers  actual  acquisition  costs for the  drug. 
This  inspection  was conducted  as part  of Operation  Restore  Trust  (ORT).  The 
initiative,  focused  in five States,  involves multi-disciplinary  teams  of State  and  Federal 
personnel  seeking  to reduce  fraud,  waste,  and  abuse  in nursing  homes,  hospices,  home 
health  agencies,  and  by durable  medical  equipment  suppliers. 
METHODOIX)GY 
For  the  purposes  of comparing  pricing  information,  we collected  data  from 
pharmaceutical  purchasing  organizations  or buying groups,  mail-order  pharmacies,  and 
retail  pharmacy  stores.  We  used  Medicares  allowed  amount  for this comparison.  The 
allowed  amount  includes  the  80 percent  the  Medicare  program  pays directly  to the 
supplier  and  the  20 percent  copayment  for which the  beneficiary  is responsible. 
Since  albuterol  sulfate  (0.0839% concentration)  is a multiple  source  drug with both 
brand  and  generic  versions,  the  DMERCS  base  their  reimbursement  on the  lower  of 
the  estimated  acquisition  cost  (EAC)  or the  median  of the  national  average  wholesale 
price  (AWP)  for all generic  sources.  At the  present  time,  the  four  DMERCS  base 
their  reimbursement  allowance  on the  AWP  for the  generic  sources  of albuterol 
sulfate.  Due  to the  fact  that  Medicare  uses the  prices  of generic  drugs  to  compute 
reimbursement  for albuterol  sulfate,  we compared  Medicares  reimbursement  amount 
with  the  prices  that  buying  groups  negotiated  or pharmacies  charged  for the  generic 
versions  of albuterol  sulfate. 
The  pricing  for albuterol  sulfate,  during  the  time  of our  beginning  survey work  in April 
1995, was $0.43 per  milliliter  in three  DMERCS  and  $0.40 in one  DMERC.  Since  90 
percent  of the  albuterol  sulfate  paid  for by the  DMERCS  in 1994 was in the  three 
DMERCS  with  reimbursement  of $0.43, we believe  it is fair to use this single  price  for 
comparison  purposes.  The  allowance  for albuterol  sulfate  can be  updated  on a 
quarterly  basis  by the  DMERCS.  Since the  time  of our  inspection  work,  one  DMERC 
has increased  the  allowance  amount,  one  has decreased  the  allowance  amount,  and 
2
 two remain  at $0.43.  We  have  chosen  to use $0.43 as the  Medicare  allowance  since 
that  was the  amount  that  was in effect  at the  start  of our  data  collection. 
Surveyof BuyingGroupsandMail-OrderPharmacks 
Using  a standardized  data  collection  instrument,  we obtained  pricing  information  on 
albuterol  sulfate  from  buying groups  and  mail  order  pharmacies.  We  surveyed  five 
buying  groups  which were  considered  prominent  within  the  industry.  The  groups 
ranged  in size from  970 to 2500 member  stores  nationwide.  Buying groups  negotiate 
prices  for prescription  drugs from  drug  manufacturers/suppliers.  Pharmacies  that 
belong  to the  buying  groups  are  able  to purchase  drugs based  on these  negotiated 
prices.  We  also selected  five of the  largest  mail-order  pharmacies  that  did not  require 
customers  to be  a member  of a particular  insurance  plan  but  would  service  any 
eligible  person.  However,  for one  of the  mail-order  pharmacies,  the  customer  had  to 
be  a member  of a senior  citizen  organization  and  the  membership  fee  for joining  the 
organization  was factored  into  the  price.  We  also obtained  any additional  fees  such as 
shipping  and  handling  or membership  fees  that  might  be  charged  by the  mail-order 
pharmacies.  We  factored  these  charges  into  the  prices. 
Surveyof RetailPharmacyStores 
Using  a standardized  data  collection  instrument,  we contacted  retail  pharmacy  stores 
in four  States  to determine  their  prices  for albuterol  sulfate.  We  purposefully  selected 
four  States  (California,  Florida,  Missouri,  and  North  Carolina)  for which  statewide 
information  on pharmacies  was available  through  our  Office  of Audit  Services  (OAS). 
For  each  State,  we randomly  selected  35 retail  chain  pharmacies.  Ninety-six  percent 
of the  pharmacies  in our  survey (134 of 140) provided  information  to us.  Seventy-
eight  percent  of the  retail  pharmacies  (109 of 140) provided  us with prices  for  the 
generic  versions  of albuterol  sulfate. 
This  inspection  was conducted  in accordance  with the  Quality  Standards  for  Inspections 
issued  by the  Presidents  Council  on Integrity  and  Efficiency. 
3
 FINDINGS
MANYP  HARMACIES  SURVEYED  CHARGED  CUSTOMERS  LESS  FOR 
GENERIC  ALBUTEROL  SULFATE  THAN  MEDICARE  ALLOWED. 
A customer  would  pay less than  Medicare  for albuterol  sulfate  in more  than  half  of 
the  retail  stores  surveyed  and  in all of the  mail-order  pharmacies  contacted. 
More thanhay of retailpharmaciesSLUVeyecdhtugedcustomtmlessfor genericalbuterol 
sulfatethanMedicareallowed 
Fifty-five  percent  of retail  pharmacy  stores  (60 of 109) charged  less for generic 
versions  of albuterol  sulfate  than  the  $0.43 per  milliliter  that  Medicare  allowed.  The 
chart  below  summarizes  the  prices  that  pharmacies  charged  for albuterol  sulfate. 
Many  Pharmacies  Generic  Prices  For 
Albuterol Sulfate  Are Less Than 
Medicare  Reimbursement 
Percent  of Pharmacle8 
30% 1'..
..........................................................................................27..%. . .  .......................
25% 
20% 
15% 
1o% 
6% 
nw

  $0.30  or Le$e 0.91-0.94  0.95-O.9e  0.99-0.42  0.4S-0.46  $0.4e  or More

Albuterol  Sulfate  Price  Per Milliliter 
Medloare  Allowance  = $0.49 
eouroo  1995 Retell Phermmy Survey 
Many  of the  pharmacies  prices  were  significantly  less than  the  amounts  Medicare  and 
its beneficiaries  paid  for albuterol  sulfate.  Sixteen  percent  of pharmacies  charged  at 
least  30 percent  less for generic  versions  of albuterol  sulfate  than  Medicare  would 
have  allowed  for the  same  drugs.  Eleven  percent  of pharmacies  had  prices  between 
20 and  30 percent  less than  Medicare.  Almost  one-fifth  of pharmacies  (19 percent) 
charged  between  10 and  19 percent  less than  the  Medicare  allowance  of $0.43.  In 
addition,  more  than  one-third  of pharmacies  in our  survey  (39 percent)  provide  a 
further  discount  to senior  citizens  purchasing  prescription  drugs. 
4
 All five mad-orderphazrnaciecshargedlessthantheMedicareallowancefor albuteml 
sulfate. 
All five of the  mail-order  pharmacies  charged  their  customers  less for albuterol  sulfate 
then  Medicare  and  its beneficiaries  paid  for albuterol  sulfate.  Four  of these 
pharmacies  charges  ranged  from  $0.38 to $0.42, or between  2 to  12 percent  less than 
Medicare  allowances  per  milliliter  of drug.  One  of them  charged  only $0.20, or 53 
percent  less.  If a Medicare  beneficiary  received  375 milliliters  of albuterol  sulfate  per 
month  for inhalation  therapy,  Medicare  and  the  beneficiary  would  save anywhere  from 
$4 to  $87 a month  if Medicare  based  its reimbursement  on the  prices  charged  by these 
mail  order  companies.  The  savings to Medicare  and  its beneficiaries  could  be  even 
greater  since  four  of the  mail-order  companies  offer  lower  prices  when  larger  volumes 
of drugs  are  purchased.  For  the  example  used  above  of 375 milliliters  of albuterol 
sulfate,  these  pharmacies  would  have  charged  an additional  2 to 20 percent  less per 
milliliter. 
ALL  F~  BUYING GROUPS SURKt?YEDHAD NEGOTL41ED PMCES 
SUBST~LYLOmR  THAN MEDICARE RHMBURSEMENT  FOR 
ALBUTEROL  SULFATE. 
The  generic  drug  prices  that  five buying groups  negotiated  ranged  from  56 to  70 
percent  less than  the  $0.43 Medicare  allowed  per  milliliter  of albuterol  sulfate.  The 
thousands  of pharmacies  that  are  members  of these  buying  groups  purchase  albuterol 
sulfate  for the  prices  listed  in the  table  below.  These  prices  were  significantly  lower 
than  the  average  wholesale  prices  for generic  drugs  that  the  DMERCS  had  been  using 
to establish  the  pricing  for albuterol  sulfate. 
Price  for Generic  Version  of Albuterol  Sulfate 
II  I 
Type  of Payer  Price  per milliliter  II 
II  I 
$0.13/$0.151 
II  I  II 
$0.16 
II  I  II 
IIPharmaceutical  Buying Groups  I  $0.16  II 
II  I  II 
II  I  II 
$0.18 
II  t  II 
II  I  II 
$0.18/$0.191 
1Providedpricesfor morethan one manufacturerof genericalbuterolsulfate. 
The  buying  groups  were  able  to offer  lower  drug  purchase  prices  to their  member 
pharmacies  because  they  negotiate  prices  directly  with drug  manufacturers/suppliers. 
The  member  pharmacy  would  then  purchase  the  prescription  drug  at the  negotiated 
price  plus  a wholesaler  upcharge.  The  upcharge  is a percentage  of the  negotiated 
price  that  is applied  to their  members  purchases.  The  upcharges  that  members  of 
5  these  five buying  groups  paid  ranged  from  3 to 6 percent.  The  prices  in the  table 
include  these  upcharges  and  thereby  represent  a pharmacys  total  wholesale  purchase 
price  for  one  milliliter  of albuterol  sulfate.  Therefore,  the  average  wholesale  price 
used  to determine  Medicares  allowance  for albuterol  sulfate  was more  than  double 
the  wholesale  price  paid  by thousands  of the  buying groups  member  pharmacies. 
6
 RECOMMENDATION 
We believe  the  findings  of this report  complement  and  reinforce  those  of our  earlier 
report,  Medicare  Payments  for  Nebulizer  Drugs,  by providing  evidence  that  Medicares 
allowance  for nebulizer  drugs may be inappropriately  high.  In the  earlier  report,  we 
found  that  Medicaid  State  agencies  were  reimbursing  less for albuterol  sulfate  than 
Medicare.  We  have  provided  evidence  in this report  that  mail-order  pharmacies  and 
many  retail  pharmacy  stores  charge  customers  less for generic  versions  of albuterol 
sulfate  than  Medicare  allows.  Currently,  the  DMERCS  are  utilizing  the  median  of 
average  wholesale  prices  for generic  versions  of albuterol  sulfate  to determine  the 
allowance  amount.  We believe  using the  median  of the  published  average  wholesale 
prices  does  not  reflect  the  actual  wholesale  pricing  of albuterol  sulfate  that  is occurring 
in the  marketplace. 
We therefore  continue to believe that HCFA  should reexamine its Medicare  drug

reimbursement  methodologies  with the goal of reducing payments  for prescription

drugs, as we recommended  in our earlier  report.

For  our  readers  convenience,  we repeat  here  the  options  contained  in our  prior

report  for  changing  Medicares  payment  for prescription  drugs.

Discounted  Wholesale  Price

Many  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  identifj  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 
program.  We  have  not  thoroughly  assessed  how a 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 
7
 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. 
Accmisition  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  cost. 
AGENCY  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  National  Drug  Codes 
(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. 
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 
8
 currently  addressing  this issue through  the  regulatory  process.  The  full text  of HCFAS 
comments  are  presented  in Appendix  A, 
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. 
9
 APPENDIX  A 
AGENCY  COMMENTS 
A-1  -,, ..*,, 
~s $~. 
. 
$  DEPARTMENTOF HEALTH  & HUMAN  SERVICES  Health Care  Fmancmg  Admnmstrat[on 
:
z
% 
** 
%4>. ,-
The Adfrunmtrator 
Washmigton,  O.C.  20ZOX 
DATE:  MAY -3 19% 
TO:  June GibbsBrown 
Administrator 
FROM:  Bruce C. Vladec  M 
Administrator  % 
SUBJECT:  Office  of Inspector General (OIG) Working Drafi Reports: Appropriateness 
of Medicare-Prescription  Drug Allowance(OEI-03 -94-OO42O),Suppiier 
Acquisition  CostS for Albuterol Sulfate (OEI-03-94-O0393), A 
Comparison  of Albuteroi  S&  Prices(OEI-03-94-OO392) 
We reviewed the subject reports  Concetig  Medicare  payments for outpatient

prescription drugs.  our  detailed comments on the findkgs  and recommendations  are

attached for your co~idemtion.  H  you  for the opportunity  to review  and COmment on

thereports.

Attachment 
A-2
 Health Care Financing  Administration  (HCFA)  Comments  on 
office  of InsDector General (OIG) Working  Draft  Renorts: 
Medicare  Prescription  Drug Allowances.[0E03O949004201Ol 
Sutmlier  Accmisition  Costs for Albuterol Sulfate. 
fOEI-03-94-00393). and A Comparison  of Albuteroi  Sulfate  Prices. 
(OEI-03-94-00392\ 
OIG Recommendation 
HCFA should ree-e  its kledicue  drug reimbursement  methodologies,  with a goal of 
reducing payments as appropriate. 
HCFA Resuonse 
We concur.  HCFA is examinin g ways to reduce payments for prescription  drugs as 
follows: 
Discounted Wholesale  Price 
k  explotig  new  strategies  for C- Medicares  payment  for prescription  drugs, we 
be  constructeda fhunework  to caiculate drug prices centrally.  Also, we are developing 
a crosswalk between the c~nt  HCFA Common Procedure Coding Systems and the 
National Drug Code @DC)  to process claims using the NDC. 
Manufacturers  Rebates 
While the Administration  included a rebate mechanism in its proposed Medicare  drug 
benefit in the Heaith Care Reform legislatio~  it is not an option that HCFA is currentiy 
considering. 
Competitive Bidding 
HCFA is exploring the use of competitive  bidding  for nebuhzers  and associate  drugs 
under its demonstration  authority. 
Inherent  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. 
A-3
 Page 2 
Accmisition Cost 
This option involves ioweri.ng  drug payments  by basing them on the estimated  acquisition 
cost.  A 1994 sumey attempt was made by HCFA to collect the necessary  data to fid.ly 
implement cument regulations.  The smey  was not approved by the Office of 
Management and Budget becme  it was found  to be too burdensome to pursue due to the 
large number of physicians  and drugs involved. 
Technicai Comment 
We suggest OIG review  the proportion  of aibuterol  actually  obtained  through  a pharmacy, 
asopposed to a pharmacy  selling  to a d~ble  medical  equipment  provider  who  in turn 
sells to the Medicare  patient. 
A-4

.