Department of Health and Human Services 
OFFICE OF 
INSPECTOR GENERAL 
Medicare Reimbursement of Albuterol 
JUNE GIBBS BROWN 
Inspector General 
JUNE 2000 
OEI-03-00-00311  OFFICE OF INSPECTOR GENERAL 
The mission of the Office of Inspector General (OIG), as mandated by Public Law 95-452, is to 
protect the integrity of the Department of Health and Human Services programs as well as the 
health and welfare of beneficiaries served by them.  This statutory mission is carried out through a 
nationwide program of audits, investigations, inspections, sanctions, and fraud alerts.  The 
Inspector General informs the Secretary of program and management problems and recommends 
legislative, regulatory, and operational approaches to correct them. 
Office of Evaluation and Inspections 
The Office of Evaluation and Inspections (OEI) is one of several components of the Office of 
Inspector General.  It conducts short-term management and program evaluations (called 
inspections) that focus on issues of concern to the Department, the Congress, and the public.  The 
inspection reports provide findings and recommendations on the efficiency, vulnerability, and 
effectiveness of departmental programs. 
OEI's Philadelphia Regional Office prepared this report under the direction of Robert A. Vito, 
Regional Inspector General, and Linda M. Ragone, Deputy Regional Inspector General.  Principal 
OEI staff included: 
REGION  HEADQUARTERS 
David Tawes, Project Leader  Stuart Wright, Program Specialist 
Tara Schmerling, Program Analyst  Linda Moscoe, Technical Support Staff 
To obtain copies of this report, please call the Philadelphia Regional Office at (800) 531-9562. 
Reports are also available on the World Wide Web at our home page address: 
http://www.dhhs.gov/progorg/oei  E X E C U T I V E   S U M M A R Y  
PURPOSE 
This report compares the amount Medicare reimburses for albuterol with (1) the amounts 
reimbursed by Medicaid and the Department of Veterans Affairs, and (2) prices available 
at pharmacies. 
BACKGROUND 
Medicare does not pay for over-the-counter or most outpatient prescription drugs. 
However, Medicare Part B will cover drugs which are necessary for the effective use of 
durable medical equipment (DME).  One such drug, albuterol, is commonly used with a 
nebulizer to treat patients suffering from asthma or emphysema.  Medicare allowed 
approximately $246 million for albuterol in 1999. 
The Health Care Financing Administration (HCFA)  contracts with four DME regional 
carriers who determine reimbursement amounts for nebulizer drugs.  In general, the 
Medicare reimbursement amount for a covered drug is 95 percent of the drugs average 
wholesale price (AWP).  Of this amount, Medicare pays 80 percent while the beneficiary is 
responsible for a 20 percent copayment.  Each State Medicaid agency has the authority to 
develop its own drug reimbursement methodology subject to upper limits set by HCFA. 
Additionally, Medicaid receives rebates from drug manufacturers as required by Federal 
law.  Unlike Medicare and Medicaid, the Department of Veterans Affairs (VA) purchases 
drugs for its healthcare system directly from manufacturers or wholesalers.  There are 
several purchase options available to the VA, including the Federal Supply Schedule, 
Blanket Purchase Agreements, and VA national contracts. 
We obtained reimbursement amounts for albuterol from Medicare, Medicaid, and the VA. 
We also determined retail prices for albuterol by contacting chain and Internet pharmacies. 
We compared Medicares current reimbursement amount for albuterol to amounts 
reimbursed by Medicaid and the VA, and prices available at pharmacies. 
FINDINGS 
Medicare and its beneficiaries would save $120 million or $209 million a year if 
albuterol was reimbursed at amounts available through other Federal sources 
The Medicare reimbursement amount for albuterol is almost seven times greater than the 
VA price.  The VA purchases generic albuterol through the Federal Supply Schedule for 
only $0.07 per milligram (mg), while Medicare reimburses at $0.47 per mg.  We estimate 
1 
Medicare Reimbursement of Albuterol  OEI-03-00-00311  that Medicare and its beneficiaries would save $209 million a year if reimbursement for 
albuterol was set at the amount available to the VA under the Federal Supply Schedule. 
Medicares reimbursement amount for albuterol is almost double Medicaids upper limit of 
$0.24 per mg. We estimate that Medicare and its beneficiaries would save $120 million if 
Medicares reimbursement amount for albuterol equaled Medicaids upper limit amount. 
Medicare and its beneficiaries would save $47 million or $115 million a year if 
Medicare reimbursed albuterol at prices available at chain and Internet 
pharmacies 
Customers walking into nearly all of the chain pharmacies we contacted would pay less 
than the Medicare reimbursement amount for albuterol.  Prices at these pharmacies ranged 
from a low of $0.24 cents per mg to a high of $0.48 per mg for a single box supply.  If 
Medicare reimbursement was set at the pharmacies median price of $0.38 per mg, 
Medicare and its beneficiaries could save $47 million a year on albuterol.  Some 
pharmacies offered even lower prices for larger quantity purchases.  Prices for albuterol at 
the Internet pharmacies we visited ranged from $0.21 to $0.31 per mg for a single box 
supply.  Medicare would save almost $115 million a year if its reimbursement amount for 
albuterol equaled the median Internet pharmacy price of $0.25 per mg.  As with the chain 
pharmacies, discounts for larger quantity purchases were sometimes available. 
RECOMMENDATION 
The information in this report adds to the evidence which shows that Medicare pays too 
much for albuterol.  The finding that Medicare pays more than the VA for albuterol is not 
surprising since the VA acts as a purchaser of drugs while Medicare reimburses suppliers 
after-the-fact.  Even allowing for this difference in payment methods, Medicares 
reimbursement amount for albuterol   almost seven times higher than the cost of the drug 

to the VA   seems excessive.  It also seems excessive that Medicare beneficiaries pay 

more in just monthly copayments for albuterol than the VA pays for a whole months 
supply of the drug.  Medicaid, which reimburses for drugs in a manner similar to 
Medicare, has a federally-mandated upper limit for albuterol.  The upper limit amount 
established by HCFA is about half of the Medicare amount.  In addition, anyone with a 
prescription can walk into a retail chain pharmacy or visit an Internet pharmacy and pay a 
price for albuterol which is usually below the Medicare reimbursement amount.  These 
findings raise serious doubts about the accuracy and efficacy of Medicares payment 
policy. 
This report found that Medicare would save between $47 million and $209 million by 
lowering its reimbursement amount for albuterol to prices available through other sources. 
It is important to note that 20 percent of these savings would directly benefit Medicare 
beneficiaries through reduced copayments. 
2 
Medicare Reimbursement of Albuterol  OEI-03-00-00311  We continue to support the need for lower albuterol prices for the Medicare program and 
its beneficiaries.  We realize, however, that HCFAs power to lower drug prices through 
the use of its inherent reasonableness authority was recently limited by a provision of the 
Medicare, Medicaid, and SCHIP Balanced Budget Refinement Act of 1999.  In past 
reports, we recommended a number of other options for lowering albuterol payments. 
These recommendations included (1) greater discounting of AWPs, (2) basing payments 
on supplier acquisition costs, (3) establishing manufacturers rebates, and (4) using 
competitive bidding.  We continue to strongly believe that action needs to be taken to 
lower unreasonable drug reimbursement amounts. 
Agency Comments 
The HCFA concurred with our recommendation, noting that basing reimbursement on 
acquisition cost is probably the best way to ensure that Medicare pays fair prices for 
covered drugs.  Additionally, HCFA gave a detailed account of their numerous attempts 
to lower unreasonable drug reimbursement amounts in the Medicare program.  Currently, 
HCFA plans to utilize a number of more accurate drug prices developed by First 
Databank, publisher of a pricing compendium used by the pharmaceutical industry.  HCFA 
requested that Medicare contractors use these prices when calculating their drug 
reimbursement amounts.  The HCFA also commented that they are working to develop a 
comprehensive electronic file on the pricing of Medicare covered drugs, and are 
continuing a competitive bidding demonstration project for albuterol in Texas.  In 
addition, HCFA is consulting with the Department of Justice and the Office of Inspector 
General on the feasibility of developing additional means to ensure that accurate drug 
pricing data is used in setting Medicare reimbursement rates.  The full text of HCFAs 
comments is presented in Appendix E. 
We commend HCFAs efforts to lower Medicare drug reimbursement rates.  We fully 
support attempts to obtain more accurate prices for the Medicare program.  We believe 
that HCFAs request that Medicare contractors use the more accurate prices supplied by 
First Databank is a significant first step towards reimbursing drugs in a more appropriate 
manner. 
3 
Medicare Reimbursement of Albuterol  OEI-03-00-00311  T A B L E   O F   C O N T E N T S  
PAGE

EXECUTIVE SUMMARY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1

INTRODUCTION  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5

FINDINGS

Medicare Reimbursement Compared to VA and Medicaid  . . . . . . . . . . . . . . . . . . . . . . 10

Medicare Reimbursement Compared to Chain and Internet Pharmacies  . . . . . . . . . . . .  11

RECOMMENDATION  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  12

APPENDICES

A. Previous OIG Reports on Albuterol Reimbursement  . . . . . . . . . . . . . . . . . . . . . . . . 14

B. Calculation of Potential Savings for Albuterol  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15

C. Albuterol Prices Available at Chain Pharmacies  . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16

D. Albuterol Prices Available at Internet Pharmacies  . . . . . . . . . . . . . . . . . . . . . . . . . . 17

E. Health Care Financing Administration Comments  . . . . . . . . . . . . . . . . . . . . . . . . . . 18

4 
Medicare Reimbursement of Albuterol  OEI-03-00-00311  I N T R O D U C T I O N  
PURPOSE 
This report compares the amount Medicare reimburses for albuterol with (1) the amounts 
reimbursed by Medicaid and the Department of Veterans Affairs, and (2) prices available 
at pharmacies. 
BACKGROUND 
Medicare Coverage of Albuterol 
Medicare does not pay for over-the-counter or most outpatient prescription drugs. 
However, Medicare Part B will cover drugs which are necessary for the effective use of 
durable medical equipment (DME).  One such drug, albuterol, is commonly used with a 
nebulizer to treat patients suffering from asthma or emphysema.  Medicare allowed 
approximately $246 million for albuterol in 1999, which represents nearly half of the $545 
million allowed for all nebulizer drugs that year. 
Medicare Drug Reimbursement 
The Health Care Financing Administration (HCFA), which administers the Medicare 
program, contracts with four DME regional carriers (DMERCs) to process all claims for 
durable medical equipment and associated supplies, including nebulizer drugs.  Each 
DMERC is responsible for determining the reimbursement amount for equipment and 
supplies in their respective region based on Medicares reimbursement methodology. 
Medicares current reimbursement methodology for prescription drugs is defined by 
Section 4556 of the Balanced Budget Act of 1997.  The DMERCs base their 
reimbursement amount for a covered drug on its average wholesale price (AWP) as 
published in Drug Topics Red Book or similar pricing publications used by the 
pharmaceutical industry.  If a drug is available only in brand form, reimbursement is 
calculated by taking 95 percent of the drugs AWP.  For drugs like albuterol that have 
both brand and generic sources available, reimbursement is based on 95 percent of the 
median AWP for generic sources.  However, if a brand name products AWP is lower 
than the median generic price, Medicare reimburses 95 percent of the lowest brand price. 
Section 4316 of the Balanced Budget Act of 1997 allows HCFA to diverge from the 
statutorily-defined payment method if the method results in payment amounts which are 
not inherently reasonable.  However, HCFAs ability to use its inherent reasonableness 
authority was recently limited by a provision of the Medicare, Medicaid, and SCHIP 
Balanced Budget Refinement Act of 1999.  This provision requires the General 
5 
Medicare Reimbursement of Albuterol  OEI-03-00-00311  Accounting Office (GAO) to complete a study on the potential effects of using inherent 
reasonableness measures before HCFA can invoke the authority.  The Department of 
Health and Human Services must then publish a notice of final rule-making concerning 
inherent reasonableness in the Federal Register.  This notice must respond to both the 
GAO study and any comments received on the interim inherent reasonableness regulation. 
The Act also requires that the Department reevaluate the appropriateness of the criteria 
used to identify unreasonable payments, and take steps to ensure the use of valid and 
reliable data when exercising the inherent reasonableness authority. 
Medicaid Drug Reimbursement 
Each State Medicaid agency has the authority to develop its own drug reimbursement 
methodology subject to upper limits set by HCFA.  Like Medicare, most Medicaid 
agencies use a discounted AWP as the basis for calculating drug reimbursement amounts. 
Medicaid agencies generally use a more deeply-discounted AWP than does Medicare. 
However, HCFA has established a Medicaid upper limit for albuterol.  The payments for 
albuterol and other drugs with Federal upper limits must not exceed, in the aggregate, the 
established upper limit amounts.  The HCFA sets the upper limit for a drug at 150 percent 
of the lowest price listed in any of the drug pricing compendia. 
Additionally, Medicaid receives rebates from drug manufacturers as required by Federal 
law.  In 1999, the quarterly rebate for brand-name drugs was based on either 15.1 percent 
of the average manufacturer price (AMP) or the difference between the AMP and the best 
price, whichever was greater.  The AMP is the average price paid by wholesalers for 
products distributed for retail trade.  The best price is the lowest price paid by any 
purchaser with the exception of Federal agencies and State pharmaceutical assistance 
programs.  The rebate amount for generic drugs was 11 percent of AMP. 
Department of Veterans Affairs Drug Reimbursement 
Unlike Medicare and Medicaid, the Department of Veterans Affairs (VA) purchases drugs 
for its healthcare system directly from manufacturers or wholesalers.  There are several 
purchase options available to the VA, including the Federal Supply Schedule, Blanket 
Purchase Agreements, and VA national contracts. 
The Federal Supply Schedule provides agencies like the VA with a simple process for 
purchasing commonly-used products in various quantities while still obtaining the 
discounts associated with volume buying.  Using competitive procedures, contracts are 
awarded to companies to provide services and supplies at the Federal Supply Schedule 
price over a given period of time.  Agencies are not required to use the Federal Supply 
Schedule, however, and are sometimes able to negotiate prices lower than the Federal 
Supply Schedule price. 
6 
Medicare Reimbursement of Albuterol  OEI-03-00-00311  Related Work by the Office of Inspector General 
The Office of Inspector General (OIG) has studied a number of issues relating to Medicare 
reimbursement of albuterol.  Brief summaries of selected studies are presented in 
Appendix A. 
METHODOLOGY 
Medicare Reimbursement Amounts 
Medicare identifies covered drugs using codes in HCFAs Common Procedure Coding 
System (HCPCS).  The HCPCS codes define the type of drug and, in most cases, a dosage 
amount.  There are currently two HCPCS codes for albuterol, one for a unit dose solution 
and another for a concentrated solution.  Because nearly all of the billing for albuterol is 
for the unit dose form of the drug, we only reviewed the reimbursement amounts for the 
unit dose code.  The term unit dose refers to a solution of 0.083 percent albuterol. 
As of January 2000, the HCPCS code for the unit dose form of albuterol is J7619.  This 
code is defined as, albuterol, inhalation solution administered through DME, unit dose 
form, per milligram.  In 1999, HCPCS code K0505 was used to bill for the unit dose 
form of albuterol.  The HCPCS code definition of K0505 is identical to J7619. 
We obtained current fee schedule reimbursement amounts for HCPCS code J7619 from 
the four DMERCs.  The reimbursement amount for albuterol was the same for each of the 
four DMERCs.  For the purpose of this report, Medicares reimbursement amount 
includes both the 80 percent Medicare payment and the 20 percent beneficiary copayment. 
Matching HCPCS Codes to National Drug Codes 
Unlike Medicare, Medicaid and the VA use national drug codes (NDCs) rather than 
HCPCS codes to identify drugs products.  Because of these coding differences, we used 
the January 2000 CD-ROM edition of Drug Topics Red Book to identify the specific 
NDCs that would match the HCPCS code definition for albuterol.  Each drug 
manufactured or distributed in the United States has a unique NDC.  The NDCs identify 
the manufacturer of the drug, the product dosage form, and the package size.  From the 
NDCs, the drugs can be identified as either brand or generic.  Because Medicare uses 
generic products to determine its reimbursement amount for albuterol, we only selected 
generic albuterol NDCs.  We found 17 NDCs for generic albuterol which matched the 
HCPCS definition of J7619. 
7 
Medicare Reimbursement of Albuterol  OEI-03-00-00311  Medicaid Reimbursement Amounts 
We obtained from HCFA the Medicaid upper limit amount for albuterol as of April 1, 
2000.  We also accessed the Medicaid Drug Rebate Initiative system to determine the 
Medicaid rebate amounts for albuterol.  We used the most recent rebate amounts available 
for each NDC code, which in most cases was the fourth quarter of 1999.  Four of the 17 
NDCs reviewed did not have any rebate information available.  We calculated the median 
milliliter (ml) rebate amount for the remaining 13 NDCs in order to determine a single 
Medicaid rebate amount. 
VA Pricing 
To determine the VAs fourth quarter 1999 costs for albuterol, we obtained a file from the 
VA containing their contracted prices.  The VA pricing file contained Federal Supply 
Schedule prices for 7 of the 17 matching albuterol NDCs.  To determine a single VA 
price, we calculated the median price per ml for these seven NDCs. 
Pharmacy Pricing 
We contacted three chain pharmacies in each of eight cities (Atlanta, Boston, Chicago, 
Dallas, Kansas City, New York, Philadelphia, and San Francisco).  We also visited the 
websites of three Internet pharmacies.  Our review of the applicable NDCs indicates that 
the smallest amount of unit dose albuterol available for purchase is 75 ml, which is usually 
supplied in one box of twenty-five 3 ml vials.  Therefore, we requested that the 
pharmacies provide their price for this amount of the drug.  To determine if there were 
volume discounts available, we asked for the price of four boxes of albuterol (300 ml), 
which is a typical monthly usage amount for the drug.  We then calculated the median 
price per ml of a single box supply for both chain and Internet pharmacies. 
Conversion of Prices 
The HCPCS code for the unit dose form of albuterol, J7619, is reimbursed per milligram 
(mg).  Medicaids upper limit is based on 1 ml of 0.083 percent albuterol solution.  The 
NDCs used to determine the Medicaid rebates, VA prices, and pharmacy prices were all 
based on 3 ml vials of 0.083 percent albuterol solution.  Consequently, we needed to 
convert milliliter prices of albuterol into milligram prices. 
A 3 ml vial of 0.083 percent albuterol solution contains 2.5 mg of albuterol.  Therefore,  1 
ml of solution contains 0.833 mg of albuterol (2.5 divided by 3).  After determining a per 
ml price for albuterol from each of the sources, we converted this to a per mg price simply 
by dividing the per ml price by 0.833.  For example, by dividing the Medicaid upper limit 
price of $0.20 per ml by 0.833, we calculated that the Medicaid upper limit price equals 
$0.24 per milligram. 
8 
Medicare Reimbursement of Albuterol  OEI-03-00-00311  Calculating Potential Medicare Savings 
To calculate potential Medicare savings, we compared Medicares reimbursement amount 
for albuterol to amounts available at the VA, Medicaid, chain pharmacies, and Internet 
pharmacies.  We determined the percentage difference in prices by subtracting the source 
price from the Medicare price, and then dividing this number by the Medicare price. 
These percentages indicate how much Medicare would save if reimbursement for albuterol 
was based on prices provided by other sources.  We then multiplied these percentages by 
Medicares 1999 allowed charges for albuterol in order to calculate dollar savings.  A 
table showing the data used to calculate potential savings is presented in Appendix B. 
9 
Medicare Reimbursement of Albuterol  OEI-03-00-00311  F I N D I N G S  
Medicare and its beneficiaries would save $120 million or 
$209 million a year if albuterol was reimbursed at amounts 
available through other Federal sources 
The Medicare reimbursement amount for albuterol is almost seven times greater 
than the VA price 
The median Federal Supply Schedule price available to the VA for generic albuterol is 
only $0.07 per mg, compared to $0.47 per mg for Medicare.  We estimate that Medicare 
and its beneficiaries would save $209 million a year if reimbursement for albuterol was set 
at the amount available to the VA under the Federal Supply Schedule. This savings 
represents 85 percent of the $246 million in Medicare allowed charges for albuterol in 
1999.  A Medicare beneficiary using 250 mg of albuterol per month would pay more in 
just the Medicare copayment ($23.50) than the VA would pay ($17.50) to purchase the 
drug outright.  Table 1 below compares the Medicare reimbursement amount to prices 
available through other sources.  It also provides potential Medicare savings and 
beneficiary copayments based on various reimbursement levels. 
TABLE 1:  COMPARISON OF ALBUTEROL PRICES 
Cost of Typical  Monthly Beneficiary  Potential Annual 
Price 
Pricing Source  Individual Monthly  Copayment Based on  Medicare and 
per mg 
Usage (250 mg)  Source Price  Beneficiary Savings 
Medicare Reimbursement 
$0.47  $117.50  $23.50  N/A 
Amount 
Department of Veterans 
$0.07  $17.50  $3.50  $209,478,193 
Affairs Median Cost 
Medicaid Upper Limit 
$0.24  $60.00  $12.00  $120,449,961 
Amount 
Chain Pharmacy Median 
$0.38  $95.00  $19.00  $47,132,593 
Price 
Internet Pharmacy 
$0.25  $62.50  $12.50  $115,213,006 
Median Price 
The Medicare reimbursement amount for albuterol is nearly twice the Medicaid 
reimbursement amount 
The HCFA has set Medicaids upper limit for albuterol at $0.24 per mg, yet Medicare 
DMERCs reimburse albuterol at $0.47 per mg.  We estimate that Medicare and its 
10 
Medicare Reimbursement of Albuterol  OEI-03-00-00311  beneficiaries would save $120 million a year if Medicares reimbursement amount for 
albuterol equaled Medicaids upper limit amount.  These potential savings represent 
almost one-half of Medicare allowed charges for albuterol in 1999. 
In addition to the lower reimbursement amount, Medicaid also receives a rebate for 
generic albuterol of approximately $0.01 per mg.  This would create an additional $5.2 
million in savings a year for Medicare. 
Medicare and its beneficiaries would save $47 million or 
$115 million a year if Medicare reimbursed albuterol at prices 
available at chain and Internet pharmacies 
Customers walking into nearly all of the chain pharmacies we contacted would 
pay less than the Medicare reimbursement amount for albuterol 
Twenty-two of the 24 pharmacies we contacted charge customers less than the Medicare 
reimbursement amount for albuterol.  Prices at the 24 chain pharmacies ranged from a low 
of $0.25 cents per mg to a high of $0.48 per mg for a single box supply.  Based on the 24 
pharmacies median price of $0.38 per mg, Medicare and its beneficiaries would save $47 
million a year on albuterol. 
Some pharmacies offered even lower prices for larger quantities of the drug.  For example, 
one chain pharmacy offered four boxes of albuterol (a typical monthly supply) for $35.94, 
a cost of only $0.14 per mg.  Medicare would have reimbursed $117.50 for the same 
amount.  If Medicare reimbursed albuterol at $0.14 per mg, it would save 70 percent of 
current albuterol payments.  The prices for albuterol available at the chain pharmacies we 
contacted are presented in Appendix C. 
Customers purchasing albuterol at Internet pharmacies would pay lower prices 
than Medicare 
Prices for albuterol at the Internet pharmacies we visited ranged from $0.21 to $0.31 per 
mg for a single box supply.  Medicare would save almost $115 million a year if its 
reimbursement amount for albuterol equaled the median Internet pharmacy price of $0.25 
per mg.  As with the chain pharmacies, discounts for larger quantity purchases were 
sometimes available.  The lowest price found for a four-box supply of albuterol was 
$41.94, a cost of $0.17 per mg.  If Medicare reimbursed albuterol at $0.17 per mg, it 
would save 64 percent of current albuterol payments. The prices for albuterol at each of 
the Internet pharmacies we contacted are presented in Appendix D. 
11 
Medicare Reimbursement of Albuterol  OEI-03-00-00311  R E C O M M E N D A T I O N  
The information in this report adds to the evidence which shows that Medicare pays too 
much for albuterol.  The finding that Medicare pays more than the VA for albuterol is not 
surprising since the VA acts as a purchaser of drugs while Medicare reimburses suppliers 
after-the-fact.  Even allowing for this difference in payment methods, Medicares 
reimbursement amount for albuterol   almost seven times higher than the cost of the drug 

to the VA   seems excessive.  It also seems excessive that Medicare beneficiaries pay 

more in just monthly copayments for albuterol than the VA pays for a whole months 
supply of the drug.  Medicaid, which reimburses for drugs in a manner similar to 
Medicare, has a federally-mandated upper limit for albuterol.  The upper limit amount 
established by HCFA is about half of the Medicare amount.  In addition, anyone with a 
prescription can walk into a retail chain pharmacy or visit an Internet pharmacy and pay a 
price for albuterol which is usually below the Medicare reimbursement amount.  These 
findings raise serious doubts about the accuracy and efficacy of Medicares payment 
policy. 
This report found that Medicare would save between $47 million and $209 million by 
lowering its reimbursement amount for albuterol to prices available through other sources. 
It is important to note that 20 percent of these savings would directly benefit Medicare 
beneficiaries through reduced copayments. 
We continue to support the need for lower albuterol prices for the Medicare program and 
its beneficiaries.  We realize, however, that HCFAs power to lower drug prices through 
the use of its inherent reasonableness authority was recently limited by a provision of the 
Medicare, Medicaid, and SCHIP Balanced Budget Refinement Act of 1999.  In past 
reports, we recommended a number of other options for lowering albuterol payments. 
These recommendations included (1) greater discounting of AWPs, (2) basing payments 
on supplier acquisition costs, (3) establishing manufacturers rebates, and (4) using 
competitive bidding.  We continue to strongly believe that action needs to be taken to 
lower unreasonable drug reimbursement amounts. 
Agency Comments 
The HCFA concurred with our recommendation, noting that basing reimbursement on 
acquisition cost is probably the best way to ensure that Medicare pays fair prices for 
covered drugs.  Additionally, HCFA gave a detailed account of their numerous attempts 
to lower unreasonable drug reimbursement amounts in the Medicare program.  Currently, 
HCFA plans to utilize a number of more accurate drug prices developed by First 
Databank, publisher of a pricing compendium used by the pharmaceutical industry.  HCFA 
requested that Medicare contractors use these prices when calculating their drug 
reimbursement amounts.  The HCFA also commented that they are working to develop a 
12 
Medicare Reimbursement of Albuterol  OEI-03-00-00311  comprehensive electronic file on the pricing of Medicare covered drugs, and are 
continuing a competitive bidding demonstration project for albuterol in Texas.  In 
addition, HCFA is consulting with the Department of Justice and the Office of Inspector 
General on the feasibility of developing additional means to ensure that accurate drug 
pricing data is used in setting Medicare reimbursement rates.  The full text of HCFAs 
comments is presented in Appendix E. 
OIG Response 
We commend HCFAs efforts to lower Medicare drug reimbursement rates.  We fully 
support attempts to obtain more accurate prices for the Medicare program.  We believe 
that HCFAs request that Medicare contractors use the more accurate prices supplied by 
First Databank is a significant first step towards reimbursing drugs in a more appropriate 
manner. 
13 
Medicare Reimbursement of Albuterol  OEI-03-00-00311  A P P E N D I X   A 
Previous OIG Reports on Albuterol Reimbursement

Are Medicare Allowances for Albuterol Sulfate Reasonable? (OEI-03-97-00292), 

August 1998.  We found that Medicare would allow between 56 to 550 percent more than the

VA would pay for generic versions of albuterol sulfate in 1998, and 20 percent more than the

average Medicaid payment for albuterol sulfate in 1997.  We also found that Medicare allowed

333 percent more than available acquisition costs for the drug in 1998.  Customers of mail-order

pharmacies would pay up to 30 percent less than Medicare for albuterol sulfate in 1998. 

A Comparison of Albuterol Sulfate Prices (OEI-03-94-00392), June 1996.  We found that

many of the pharmacies surveyed charged customers less than the Medicare allowed amount for

generic albuterol sulfate.  The five buying groups surveyed had negotiated prices between 56 and

70 percent lower than Medicares reimbursement amount for the drug.

Suppliers Acquisition Costs for Albuterol Sulfate (OEI-03-94-00393), June 1996.  We found

that Medicares allowances for albuterol sulfate substantially exceeded suppliers acquisition costs

for the drug. The Medicare program could have saved $94 million of the $182 million allowed for

albuterol during the 14-month review period if Medicare reimbursement amounts had been based

on average supplier invoice costs. 

Medicare Payments for Nebulizer Drugs (OEI-03-94-00390), February 1996.  We found that

Medicare and its beneficiaries paid about $37 million more for three nebulizer drugs in 17 States

than Medicaid would have paid for equivalent drugs.  In addition, we found that the potential

savings were not limited to the three nebulizer drugs and 17 states which were reviewed.

14 
Medicare Reimbursement of Albuterol  OEI-03-00-00311  A P P E N D I X   B 
Calculation of Potential Savings for Albuterol

(1)	 To determine percentage differences in albuterol prices, we subtracted the source price 
from the Medicare price.  We then divided this number by the Medicare price. 
(2)	 To calculate potential savings, we multiplied Medicares 1999 allowed charges for 
albuterol by the percentage difference in price. 
1999  Potential 
Medicare  Percentage 
Price  Medicare  Medicare and 
Price Source  Price  Difference 
per mg  Allowed  Beneficiary 
per mg  in Price* 
Charges  Savings 
VA Median Cost  $0.07  $0.47  85.1%  $246,136,877  $209,478,193 
Medicaid Upper Limit Amount  $0.24  $0.47  48.9%  $246,136,877  $120,449,961 
Chain Pharmacy Median Price  $0.38  $0.47  19.1%  $246,136,877  $47,132,593 
Internet Pharmacy Median Price  $0.25  $0.47  46.8%  $246,136,877  $115,213,006 
* Percentage rounded to nearest tenth 
15 
Medicare Reimbursement of Albuterol  OEI-03-00-00311  A P P E N D I X   C 
Albuterol Prices Available at Chain Pharmacies

Price of 1 Box  1 Box  Price of 4 Boxes  4 Box 
City  Pharmacy  (75ml)  per mg Price  (300 ml)  per mg Price 
Atlanta  CVS  $22.99  $0.37  $91.99  $0.37 
Atlanta  Drug Emporium  $28.95  $0.46  $102.95  $0.41 
Atlanta  Walmart  $20.54  $0.33  $52.68  $0.21 
Boston  CVS  $29.29  $0.47  $117.99  $0.47 
Boston  K Mart  $27.99  $0.45  $86.59  $0.35 
Boston  Walgreens  $26.99  $0.43  $106.89  $0.43 
Chicago  K Mart  $21.99  $0.35  $80.59  $0.32 
Chicago  Osco  $27.69  $0.44  $110.76  $0.44 
Chicago  Walgreens  $28.19  $0.45  $112.76  $0.45 
Dallas  Drug Emporium  $15.44  $0.25  $35.94  $0.14 
Dallas  Walgreens  $23.89  $0.38  $94.99  $0.38 
Dallas  Walmart  $21.54  $0.34  $52.68  $0.21 
Kansas City  K Mart  $27.99*  $0.37  $99.19*  $0.33 
Kansas City  Walgreens  $23.99  $0.38  $95.79  $0.38 
Kansas City  Walmart  $21.54  $0.34  $52.98  $0.21 
New York  CVS  $22.99  $0.37  $91.99  $0.37 
New York  K Mart  $26.89*  $0.36  $98.00*  $0.33 
New York  Walgreens  $27.39  $0.44  $108.69  $0.43 
Philadelphia  Drug Emporium  $28.95  $0.46  $102.95  $0.41 
Philadelphia  Walgreens  $26.99  $0.43  $107.96  $0.43 
Philadelphia  Walmart  $20.54  $0.33  $52.68  $0.21 
San Francisco  Rite Aid  $21.98  $0.35  $57.69  $0.23 
San Francisco  Safeway  $26.99  $0.43  $81.49  $0.33 
San Francisco  Walgreens  $29.89  $0.48  $117.49  $0.47 
* Price of product is for box of 90 ml rather than 75 ml. 
16 
Medicare Reimbursement of Albuterol  OEI-03-00-00311 A P P E N D I X   D 
Albuterol Prices Available at Internet Pharmacies

Price of 1 Box  1 Box  Price of 4 Boxes  4 Box 
Pharmacy  (75 ml)  per mg Price  (300 ml)  per mg Price 
Drugstore.com  $15.78  $0.25  $62.50  $0.25 
Pharmor.com  $19.29  $0.31  $76.89  $0.31 
Planetrx.com  $13.23  $0.21  $41.94  $0.17 
17 
Medicare Reimbursement of Albuterol  OEI-03-00-00311  A P P E N D I X   E 
Health Care Financing Administration Comments

In this appendix, we present, in full, comments from the Health Care Financing 
Administration. 
18 
Medicare Reimbursement of Albuterol  OEI-03-00-00311  A P P E N D I X   E 
19 
Medicare Reimbursement of Albuterol  OEI-03-00-00311  A P P E N D I X   E 
20 
Medicare Reimbursement of Albuterol  OEI-03-00-00311  A P P E N D I X   E 
21 
Medicare Reimbursement of Albuterol  OEI-03-00-00311  A P P E N D I X   E 
22 
Medicare Reimbursement of Albuterol  OEI-03-00-00311  23 
Medicare Reimbursement of Albuterol  OEI-03-00-00311