Department of Health and Human Services 
OFFICE OF 
INSPECTOR GENERAL 
Comparing Drug Reimbursement: 
Medicare and 
Department of Veterans Affairs 
JUNE GIBBS BROWN 
Inspector General 
NOVEMBER 1998 
OEI-03-97-00293  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, Lead Analyst  Lisa A. Foley, Program Specialist 
Nancy J. Molyneaux 
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 
To compare Medicare allowances for prescription drugs with drug acquisition prices currently 
available to the Department of Veterans Affairs. 
BACKGROUND 
Medicare allowances for prescription drugs totaled almost $2.3 billion in 1996.  In 1997, 
allowances rose to approximately $2.75 billion. 
Medicare does not pay for over-the-counter or most outpatient prescription drugs.  However, 
under specific circumstances, Medicare Part B covers drugs used with durable medical equipment 
or infusion devices.  Medicare also covers certain drugs used in association with organ 
transplantation, dialysis, chemotherapy, and pain management for cancer treatment.  Additionally, 
the program covers certain vaccines, such as those for influenza and hepatitis B. 
Physicians and suppliers usually bill Medicare directly for the prescription drugs they provide to 
beneficiaries.  Medicare Part B reimburses covered drugs at 95 percent of the drugs average 
wholesale prices (AWPs).  The beneficiary is responsible for a 20 percent coinsurance payment. 
Unlike Medicare, 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 focused our inspection on 34 drug codes, each with over $10 million in Medicare allowed 
charges for 1996.  We then compared the amount Medicare reimbursed for these drugs to the 
VAs Federal Supply Schedule acquisition costs during the first quarter of 1998. 
FINDINGS 
Medicare and its beneficiaries could save $1 billion in 1998 if the allowed amounts for 34 
drugs were equal to prices obtained by the VA. 
After comparing the median Medicare allowance with the corresponding median VA acquisition 
cost for 34 drugs, we estimated that Medicare and its beneficiaries could save $1.03 billion in 
1998 if the Medicare allowed amounts for 34 drugs were equal to prices obtained by the VA 
under the Federal Supply Schedule. 
This savings represents almost half of the $2.07 billion in reimbursement that Medicare and its 
beneficiaries paid for these 34 drugs in 1997.  The estimated savings for individual drugs ranged 
from a high of $276 million for J9217 (leuprolide acetate) to a low of $16,460 for K0523 
(concentrated metaproteranol sulfate). 
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i  Medicare allowed between 15 and 1600 percent more than the Department of Veterans Affairs 
paid for the 34 drugs reviewed. 
The Medicare allowance was greater than the VA acquisition cost for every drug reviewed.  For 3 
of the 34 drugs, Medicare allowed more than 16 times the VA acquisition cost.  Eleven drugs had 
Medicare allowances that were between two and six times higher than the VA cost.  For only two 
drugs was the difference between Medicare reimbursement and VA cost less than 25 percent. 
RECOMMENDATIONS 
The Department of Veterans Affairs purchases drugs for its healthcare system directly from 
manufacturers or wholesalers.  Conversely, Medicare reimburses doctors and suppliers for drugs 
which they administer or supply to beneficiaries.  We recognize that the Health Care Financing 
Administration (HCFA) and the VA operate under different statutory constraints.  Nevertheless, 
the fact remains that another Federal agency can get prescription drugs for a drastically lower 
price than Medicare. 
Previous reports of the Office of Inspector General found that actual wholesale prices available to 
physicians and suppliers are often significantly lower than the Medicare allowed amounts.  This 
report provides additional evidence that the published AWPs used in determining the Medicare 
allowed amounts for certain prescription drugs can be many times greater than the actual 
acquisition costs available in the marketplace. 
We believe our current findings provide further support for recommendations made in earlier 
reports.  We previously recommended that HCFA reexamine its Medicare drug reimbursement 
methodologies with the goal of reducing payments as appropriate.  The HCFA concurred with 
this recommendation.  We outlined a number of options for implementing this recommendation, 
including: (1) greater discounting of published average wholesale prices, (2) basing payment on 
acquisition costs, (3) establishing manufacturers rebates similar to those used in the Medicaid 
program, and (4) using competitive bidding. 
We continue to support the need for a comprehensive statutory reform of Medicare's prescription 
drug reimbursement methodology.  A number of proposals addressing reform have been offered 
by both the Administration and members of Congress.  However, until legislation can be enacted 
providing for such reform, we recommend that HCFA utilize the new inherent reasonableness or 
competitive bidding authorities provided in the Balanced Budget Act of 1997 to reduce 
Medicares unreasonably high payments for certain drugs. 
AGENCY COMMENTS 
The HCFA concurred with our recommendations, stating that it appreciates the OIGs continuous 
efforts to assist it in obtaining the lowest prices for covered drugs.  The HCFA noted that it has 
made several efforts to reduce excessive reimbursement rates, including using an inherent 
reasonableness adjustment for albuterol sulfate.  The OIG supports these efforts and we believe 
HCFA should continue to use its inherent reasonableness authority to lower inappropriate 
payments for other drugs with excessive reimbursement rates. 
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ii  T A B L E  O F  C O N T E N T S

PAGE

EXECUTIVE SUMMARY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  i

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

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

Potential savings of $1 billion  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6

Medicare allowances are greater than VA cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6

RECOMMENDATIONS  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8

APPENDICES

A: Description of 34 HCPCS Codes  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . A-1

B: Estimated 1998 Savings by HCPCS Code  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . B-1

C: Health Care Financing Administration Comments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . C-1
 I N T R O D U C T I O N

PURPOSE 
To compare Medicare allowances for prescription drugs with drug acquisition prices currently 
available to the Department of Veterans Affairs. 
BACKGROUND 
Medicare allowances for prescription drugs totaled almost $2.3 billion in 1996.  In 1997, 
allowances rose to approximately $2.75 billion.  Medicare allowances include both the Medicare 
payment and the 20 percent copayment made by the beneficiary. 
Medicare Coverage and Payment of Prescription Drugs 
Medicare does not pay for over-the-counter or most outpatient prescription drugs.  However, 
under specific circumstances, Medicare Part B covers drugs used with durable medical equipment 
(DME) or infusion devices.  Medicare also covers certain drugs used in association with organ 
transplantation, dialysis, chemotherapy, and pain management for cancer treatment.  Additionally, 
the program covers certain vaccines, such as those for influenza and hepatitis B. 
Physicians and suppliers usually bill Medicare directly for the prescription drugs they provide to 
beneficiaries.  Medicare Part B reimburses covered drugs at 95 percent of the drugs average 
wholesale prices (AWPs).  The beneficiary is responsible for a 20 percent coinsurance payment. 
The Health Care Financing Administration (HCFA) contracts with local carriers and four DME 
regional carriers (DMERCs) to process Part B claims and establish the Medicare allowed amounts 
for covered drugs.  These carriers determine the allowed amount for a drug based on the AWPs 
as reported in the Red Book or similar pricing publications used by the pharmaceutical industry.  If 
a drug has 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, a new median including the brand must be calculated.  Beginning in 1999, 
Medicare will calculate the AWP for multiple-source drugs at the lower of the median generic 
AWP or the lowest brand-name AWP. 
The HCFA and its carriers identify drug products using codes in HCFAs Common Procedure 
Coding System (HCPCS).  The HCPCS codes define the type of drug, and in most cases, a 
dosage amount.  The codes do not identify the specific drug product billed. 
Department of Veterans Affairs Payments for Prescription Drugs 
Unlike Medicare, the Department of Veterans Affairs (VA) purchases drugs for its healthcare 
system directly from manufacturers or wholesalers.  The VA uses National Drug Codes (NDCs) 
rather than HCPCS codes to identify drugs products.  Each drug manufactured or distributed in 
)))))))))))
1  the United States has a unique NDC.  The NDCs identify the manufacturer of the drug, the 
product dosage form, and the package size. 
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 over a given 
period of time.  Although the General Services Administration awards most Federal Supply 
Schedule contracts, the VA awards contracts for certain medical items.  Agencies are not required 
to use the Federal Supply Schedule, however, and are able to negotiate prices lower than the 
Federal Supply Schedule price. 
New Authorities Provided by the Balanced Budget Act 
A provision within the Balanced Budget Act of 1997 allows Medicare to diverge from a 
statutorily defined payment method if the application results in a payment amount that is not 
inherently reasonable.  Additionally, the Act provides HCFA with the authority to conduct 
competitive bidding demonstrations.  The legislation authorizes up to five of these demonstrations 
for health care items and services covered by the Medicare fee-for-service program.  All 
demonstrations must be completed by December 31, 2002. 
Related Work by the Office of Inspector General 
This report is one of several Office of Inspector General (OIG) reports concerning Medicare 
payments for prescription drugs.  In 1997, we released Excessive Medicare Payments for 
Prescription Drugs (OEI 03-97-00290), which found that Medicare allowances for 22 drugs 
exceeded actual wholesale prices by $447 million in 1996.  In 1996, we released a report entitled 
Appropriateness of Medicare Prescription Drug Allowances (OEI-03-96-00420) which 
compared Medicare drug reimbursement mechanisms with Medicaid mechanisms and found that 
Medicare could achieve significant savings by adopting reimbursement strategies similar to those 
used by Medicaid.  The OIG has also released several reports focusing on the cost of inhalation 
drugs covered by Medicare.  Medicare Payments for Nebulizer Drugs (OEI-03-94-00390), A 
Comparison of Albuterol Sulfate Prices (OEI-03-94-00392), and Suppliers Acquisition Costs for 
Albuterol Sulfate (OEI-03-94-00393) all found Medicare allowances for inhalation drugs to be 
excessive. 
METHODOLOGY 
We focused our inspection on the HCPCS codes with over $10 million in Medicare allowed 
charges for 1996.  We then compared the amount Medicare reimburses for these drugs to the 
VAs acquisition costs during the first quarter of 1998. 
We collected data from four sources.  We accessed the HCFA National Claims History (NCH) 
File to get information concerning Medicare allowances and utilization for prescription drugs in 
1996 and 1997.  We gathered reimbursement rates for specific Medicare drug codes by contacting 
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2  several carriers.  We obtained drug acquisition costs from the VA.  We used the CD-ROM 
version of the Red Book to help us match HCPCS codes to their equivalent NDCs. 
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3
 Medicare Allowances for Prescription Drugs 
To determine total Medicare payments for prescription drugs, we compiled a list of HCPCS codes 
representing all drugs covered by Medicare in 1996.  We selected 1996 because it was the most 
recent year with complete data in the NCH file.  We then determined the Medicare allowance and 
utilization for each of the more than 400 HCPCS codes using HCFAs Part B Extract Summary 
System (BESS).  Next, we aggregated the individual allowances and utilization to determine the 
total allowance and utilization for all prescription drugs covered by Medicare in 1996. 
We arrayed the HCPCS codes by their allowances and found that 40 codes each had over $10 
million in allowances for 1996.  These 40 codes represented just over $2 billion in allowances for 
1996, and comprised 88 percent of the total Medicare allowance for all prescription drugs. 
We removed several HCPCS codes from our review.  Codes J7699, J7999, and J3490 were 
removed because they are defined as either not otherwise classified or unclassified drugs.  We 
also chose not to use code A4646, an iodine product.  Two Factor VIII codes (J7190 and J7192) 
were removed because we knew from previous studies that they were difficult to match to NDCs. 
Finally, code J9010 (Doxorubicin, 50 mg) is no longer reimbursed by HCFA, and was therefore 
removed from review. 
Several other HCFA coding changes in 1997 and 1998 affected the drugs in our review.  Code 
J1625 was deleted, and replaced with J1626.  Inhalation codes J7610 and J7645 were changed to 
K0503 and K0518 respectively.  Finally, HCFA deleted inhalation codes J7620 and J7670 and 
replaced them with two codes each, one representing a concentrated dose and the other a unit 
dose form of the drug.  Code J7620 was changed to codes K0504 and K0505, while code J7670 
was changed to K0523 and K0524.  After accounting for these changes, 35 HCPCS codes 
remained in our review. 
Carrier Reimbursement for Prescription Drugs 
Because Medicare does not have uniform national allowed amounts for prescription drugs, we 
had to collect reimbursement information from various carriers.  We obtained first quarter 1998 
Medicare allowed amounts for the 35 HCPCS codes from five large Medicare carriers:  Xact 
Medicare Services, United Healthcare Insurance Company, Blue Cross and Blue Shield of Texas, 
Blue Cross and Blue Shield of Florida, and Blue Cross and Blue Shield of South Carolina.  We 
also received Medicare allowed amounts from the four DMERCs.  To determine a single 
Medicare allowed amount, we calculated median prices for each HCPCS code based on this 
information. 
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4  Matching HCPCS Codes to NDCs 
Since the VA pays for drugs based on NDCs, we used the 1998 Red Book CD-ROM update to 
determine the specific NDCs that would match the HCPCS code definition for each of the 35 
drugs.  Whenever possible, we selected NDCs that met the exact dosage delineated in the HCPCS 
code description.  When this was not possible, we chose NDCs with doses for which a conversion 
factor to the HCPCS definition could be readily determined. 
VA Acquisition Costs for Prescription Drugs 
To determine the VAs first quarter 1998 acquisition costs for the selected NDCs, we obtained a 
file from the VA containing contract acquisition costs.  We selected the Federal Supply Schedule 
price for comparison purposes.  However, some drugs had lower prices available to the VA based 
on other contractual methods. 
Eleven drugs had only one NDC match in the VA file, while six drugs had more than five 
matches.  One HCPCS code (90724) and its corresponding NDCs did not have any matches in the 
VA file.  This HCPCS code was therefore removed from the study, leaving 34 codes in our 
review.  A list of the final 34 HCPCS codes and their corresponding descriptions is presented in 
Appendix A. 
These 34 HCPCS codes represented 17 single-source, 11 multiple-source, and 6 multiple-brand 
drugs.  A single-source drug has only one brand of drug available.  A multiple-source drug has 
both brand and generic sources available.  A multiple-brand drug has more than one brand but no 
generic versions available.  Of the 11 drugs with a single NDC match in the VA file, 8 were 
single-source drugs. 
Comparing Medicare Allowance Amounts to VA Acquisition Costs 
Using the Red Book and the HCPCS code definitions, we compared product descriptions for the 
34 drugs reviewed.  For some NDCs, the corresponding HCPCS codes had an equivalent dosage, 
and therefore the VA cost could be easily compared to the Medicare allowed amount.  If  the two 
codes were not equal, we determined a conversion factor to match the NDC dosage and package 
size to the HCPCS dosage.  We then took the Federal Supply Schedule contract price for the 
NDC and divided it by the conversion factor to determine the pricing of its HCPCS code 
equivalent. 
To compare VA costs to Medicare allowed amounts, we needed to determine a single VA price 
for each drug.  For the 11 drugs with a single NDC match in the VA file, we simply used the 
Federal Supply Schedule contract price of that NDC.  For the 23 drugs with multiple NDC 
matches in the VA file, we took the median of the Federal Supply Schedule contract prices. 
Calculating Potential Medicare Savings 
To calculate potential Medicare savings, we used the utilization numbers contained in the 1997 
BESS file.  Although we used 1998 Medicare allowed amounts, we chose to use 1997 utilization 
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5  data for our calculations since the 1998 utilization data was incomplete at the time of our review. 
Because two HCPCS codes underwent dosage changes between 1997 and 1998, we needed to 
determine a conversion factor to estimate utilization for the new dosages.  In 1998, code J1625 
was changed to J1626, with the dosage changing from 1 milligram (mg) to 100 micrograms 
(mcg).  Therefore, we estimated that utilization would increase by a factor of 10 (1 mg = 1000 
mcg).  Also in 1998, the dosage of J1562 was changed from 500 milligrams to 5 grams (g). 
Therefore, we estimated that overall utilization would decrease by a factor of 10 at the new 
dosage (5000 mg = 5 g). 
Finally, for each drug, we compared the median Medicare allowed amount to the median VA 
acquisition cost for the first quarter of 1998.  We multiplied the difference by the 1997 utilization 
of each drug to calculate the potential savings to Medicare if the program reimbursed drugs at VA 
cost rather than 95 percent of AWP. 
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6  F I N D I N G S

MEDICARE AND ITS BENEFICIARIES COULD SAVE $1 BILLION IN 1998 IF THE 
ALLOWED AMOUNTS FOR 34 DRUGS WERE EQUAL TO PRICES OBTAINED BY 
THE DEPARTMENT OF VETERANS AFFAIRS. 
After comparing the median Medicare allowance with the corresponding median VA acquisition 
cost for 34 drugs, we estimated that Medicare and its beneficiaries could save $1.03 billion in 
1998 if the Medicare allowed amounts for 34 drugs were equal to prices obtained by the VA 
under the Federal Supply Schedule.  The estimated savings represents almost half of the $2.07 
billion in reimbursement that Medicare and its beneficiaries paid for these 34 drugs in 1997. 
The estimated savings for individual drugs ranged from a high of $276 million for J9217 
(leuprolide acetate) to a low of $16,460 for K0523 (concentrated metaproterenol sulfate).  Drugs 
with estimated savings greater than $20 million are listed below.  A complete list of the 34 drugs, 
Medicare and VA median costs, and potential savings is provided in Appendix B. 
DRUGS WITH 1998 ESTIMATED SAVINGS OVER $20 MILLION 
HCPCS  VA  HCFA  NUMBER OF  ESTIMATED 
CODE  GENERIC DRUG NAME  MEDIAN MEDIAN  DIFFERENCE  SERVICES  SAVINGS 
J9217  Leuprolide acetate  $299.38  $513.60  $214.22  1,286,664 $275,629,162.08 
K0505  Albuterol sulfate (dose form)  $0.12  $0.47  $0.35  343,627,175 $120,269,511.25 
J9202  Goserelin acetate  $206.29  $389.98  $183.69  329,988  $60,615,495.72 
K0518  Ipratropium bromide  $1.31  $3.34  $2.03  29,505,931  $59,897,039.93 
J9265  Paclitaxel  $109.36  $173.50  $64.14  895,067  $57,409,597.38 
Q0136  Epoetin alpha  $6.74  $12.00  $5.26  10,466,953  $55,056,172.78 
J0640  Leucovorin calcium  $1.18  $20.45  $19.27  2,833,686  $54,605,129.22 
J9045  Carboplatin  $39.50  $84.16  $44.66  982,275  $43,868,401.50 
J1626  Granisetron hcl  $8.42  $16.85  $8.43  4,105,560  $34,609,870.80 
J1562  Immune globulin (5 g)  $110.83  $439.38  $328.55  92,994  $30,553,178.70 
J9182  Etoposide  $7.84  $132.25  $124.41  181,322  $22,558,270.02 
J9000  Doxorubicin  $7.46  $43.23  $35.77  629,236  $22,507,771.72 
J1561  Immune globulin (500 mg)  $27.71  $48.65  $20.94  1,039,526  $21,767,674.44 
J2430  Pamidronate disodium  $104.39  $196.90  $92.51  229,935  $21,271,286.85 
MEDICARE ALLOWED BETWEEN 15 AND 1600 PERCENT MORE THAN THE 
DEPARTMENT OF VETERANS AFFAIRS PAID FOR THE 34 DRUGS REVIEWED. 
During the first quarter of 1998, Medicare allowed amounts were greater than the VA acquisition 
cost for every drug in our review.  However, there was substantial variation in the difference 
between Medicare reimbursement and VA cost among the 34 drugs. 
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7  Fourteen of the drugs in our study (41 percent) had Medicare allowances that were more than 
double the VA cost.  For 11 of these drugs, Medicare allowed between two and six times the VA 
acquisition cost.  For three drugs in our review (J0640, J9181, J9182), Medicare allowed more 
than 16 times the VA acquisition cost.  The chart below illustrates these drugs and their 
comparative cost to Medicare.  Appendix B lists the difference between Medicare reimbursement 
and VA cost for all 34 drugs. 
MEDICARE ALLOWS MORE THAN DOUBLE THE VA COST 
FOR 14 DRUGS 
1800% 
1 1700%  1573% 1587%1633%
T  1600% 
S
O 1500% 
C
N  1400% 
O
TI 1300% 
SI 1200% 
UI
Q 1100% 
C
A 1000% 
A 
V 900% 
R  800% 
E
V
O 700% 
E  600% 
G 479% 
A 500%  438% 
T
N 400% 
E 292%  296% 
C
300% 
R 192% 
PE 200%  100% 102%  113%  117%  126%  155% 
100% 
0% 
J1626 J0696  J9045 K0504 90732 K0518 J1245 K0505 J1562 K0503 J9000 J9181  J9182 J0640 
HCPCS CODE 
The remaining 20 drugs in our review also had Medicare reimbursements that were greater than 
VA acquisition cost.  Eighteen of the 20 drugs had Medicare reimbursements between 44 and 93 
percent higher than VA acquisition cost.  For only two drugs was the difference between 
Medicare reimbursement and VA cost less than 25 percent. 
)))))))))))
8  R E C O M M E N D A T I O N S

The Department of Veterans Affairs purchases drugs for its healthcare system directly from 
manufacturers or wholesalers.  Conversely, Medicare reimburses doctors and suppliers for drugs 
which they administer or supply to beneficiaries.  We recognize that HCFA and the VA operate 
under different statutory constraints.  Nevertheless, the fact remains that another Federal agency 
can get prescription drugs for a drastically lower price than Medicare. 
Previous reports of the Office of Inspector General found that actual wholesale prices available to 
physicians and suppliers are often significantly lower than the Medicare allowed amounts.  This 
report provides additional evidence that the published AWPs used in determining the Medicare 
allowed amounts for certain prescription drugs can be many times greater than the actual 
acquisition costs available in the marketplace. 
Our current findings provide further support for recommendations made in earlier reports.  We 
previously recommended, and HCFA concurred, that HCFA reexamine its Medicare drug 
reimbursement methodologies with the goal of reducing payments as appropriate.  We outlined a 
number of options for implementing this recommendation, including: (1) greater discounting of 
published average wholesale prices, (2) basing payment on acquisition costs, (3) establishing 
manufacturers rebates similar to those used in the Medicaid program, and (4) using competitive 
bidding. 
We continue to support the need for a comprehensive statutory reform of Medicare's prescription 
drug reimbursement methodology.  A number of proposals addressing reform have been offered 
by both the Administration and members of Congress.  However, until legislation can be enacted 
providing for such reform, we recommend that HCFA utilize the new inherent reasonableness or 
competitive bidding authorities provided in the Balanced Budget Act of 1997 to reduce 
Medicares unreasonably high payments for certain drugs. 
AGENCY COMMENTS 
The HCFA concurred with our recommendations, stating that it appreciates the OIGs continuous 
efforts to assist it in obtaining the lowest prices for covered drugs.  The HCFA noted that it 
proposed in the Presidents fiscal year 1998 budget that drugs be reimbursed at the providers 
actual acquisition cost.  The Congress did not enact the recommendation, and therefore the 
proposal was again submitted with the fiscal year 1999 budget. 
The HCFA further stated that DMERCs have issued inherent reasonableness notices to suppliers 
which proposed an 11 percent decrease in the reimbursement amount for albuterol sulfate.  The 
HCFA indicated that other drugs may be reviewed for inherent reasonableness adjustments in the 
future.  The full text of HCFAs comments is provided in Appendix C. 
)))))))))))
9  OIG RESPONSE 
We fully support HCFAs and the Administrations continued efforts to reduce excessive 
payments for covered drugs.  Until comprehensive reforms are enacted, we believe HCFA should 
continue to use its inherent reasonableness authority to lower inappropriate payments for other 
drugs with excessive reimbursement rates. 
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10  A P P E N D I X  A

DESCRIPTION OF 34 HCPCS CODES 
1996  1998 
HCPCS  HCPCS 
CODE  CODE  1998 DESCRIPTION  CHANGES 
90732  90732  Immunization, active; Pneumococcal vaccine 
J0205  J0205  Injection, Alglucerase, per 10 units 
J0585  J0585  Botulinum toxin type A, per unit  Changed 9/96 from per 100 units to per 1 unit 
J0640  J0640  Injection,Leucovorin calcium, per 50 mg 
J0696  J0696  Injection, Ceftriaxone sodium, per 250 mg 
J1245  J1245  Injection, Dipyridamole, per 10 mg 
J1440  J1440  Injection, Filgrastim (G-CSF), 300 mcg 
J1441  J1441  Injection, Filgrastim (G-CSF), 480 mcg 
J1561  J1561  Injection, Immune globulin, intravenous, 500 mg 
J1562  J1562  Injection, Immune globulin, intravenous, 5 g  Changed 1/98 from per 500mg to per 5g 
Changed 1/98 from per 1mg (J1625) to per 100mcg 
J1625  J1626  Injection, Granisetron hydrochloride, per 100 mcg  (J1626) 
J2405  J2405  Injection, Ondansetron HCl, per 1 mg 
J2430  J2430  Injection, Pamidronate disodium, per 30 mg 
Changed 4/97 from 10%, per ml (J7610) to per gram 
J7610  K0503  Acetylcysteine, unit dose form, per gram  (K0503) 
Changed 4/97 from .083%, per ml (J7620) to per mg, 
J7620  K0504  Albuterol sulfate, concentrated form, per mg  concentrated form (K0504) 
Changed 4/97 from .083%, per ml (J7620) to per mg, unit 
J7620  K0505  Albuterol sulfate, unit dose form, per mg  dose form (K0505) 
Changed 4/97 from .02%, per ml (J7645) to per mg, unit 
J7645  K0518  Ipratropium bromide, unit dose form, per mg  dose form (K0518) 
Changed 4/97 from .4%, per 2.5ml (J7670) to per 10mg, 
J7670  K0523  Metaproterenol sulfate, concentrated form, per 10 mg  concentrated form (K0523) 
Changed 4/97 from .4%, per 2.5ml (J7670) to per 10mg, 
J7670  K0524  Metaproterenol sulfate, unit dose form, per 10 mg  unit dose form (K0524) 
J9000  J9000  Doxorubicin Hcl, 10 mg 
J9031  J9031  BCG, live (intravesical), per installation 
J9045  J9045  Injection, Carboplatin, 50 mg 
J9062  J9062  Injection, Cisplatin, 50 mg 
J9181  J9181  Injection, Etoposide, 10 mg 
J9182  J9182  Injection, Etoposide, 100 mg 
J9185  J9185  Injection, Fludarabine phosphate, 50 mg 
J9202  J9202  Goserelin acetate implant, per 3.6 mg 
J9214  J9214  Interferon alfa-2b, recombinant, 1 million units 
J9217  J9217  Leuprolide acetate (for depot suspension), 7.5 mg 
J9265  J9265  Injection, Paclitaxel, 30 mg 
J9293  J9293  Injection, Mitoxantrone HCl, per 5 mg 
J9390  J9390  Vinorelbine tartrate, per 10 mg 
K0121  K0121  Cyclosporine, oral, 25 mg 
Q0136  Q0136  Injection, Epoetin alpha, (non-ESRD), per 1000 units 
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A - 1
 A P P E N D I X  B

HCPCS  VA  HCFA  PERCENTAGE NUMBER OF  ESTIMATED 
CODE  GENERIC DRUG NAME  MEDIAN MEDIAN  DIFFERENCE  DIFFERENCE  SERVICES  SAVINGS 
ESTIMATED 1998 SAVINGS BY HCPCS CODE 
90732  Pneumococcal vaccine  $5.68  $12.84  $7.16  126%  1,752,024  $12,544,491.84 
J0205  Alglucerase  $28.26  $35.15  $6.89  24%  143,084  $985,848.76 
J0585  Botulinum  $2.41  $3.98  $1.57  65%  2,843,251  $4,463,904.07 
J0640  Leucovorin calcium  $1.18  $20.45  $19.27  1633%  2,833,686  $54,605,129.22 
J0696  Ceftriaxone sodium  $5.81  $11.73  $5.92  102%  1,121,918  $6,641,754.56 
J1245  Dipryidamole  $9.65  $28.21  $18.56  192%  518,207  $9,617,921.92 
J1440  Filgrastim (300 mcg)  $106.69  $153.24  $46.55  44%  367,795  $17,120,857.25 
J1441  Filgrastim (480 mcg)  $169.55  $244.06  $74.51  44%  196,969  $14,676,160.19 
J1561  Immune globulin (500 mg)  $27.71  $48.65  $20.94  76%  1,039,526  $21,767,674.44 
J1562  Immune globulin (5 g)  $110.83  $439.38  $328.55  296%  92,994  $30,553,178.70 
J1626  Granisetron hcl  $8.42  $16.85  $8.43  100%  4,105,560  $34,609,870.80 
J2405  Ondansetron hcl  $5.03  $5.80  $0.77  15%  8,730,024  $6,722,118.48 
J2430  Pamidronate disodium  $104.39  $196.90  $92.51  89%  229,935  $21,271,286.85 
J9000  Doxorubicin*  $7.46  $43.23  $35.77  479%  629,236  $22,507,771.72 
J9031  BCG Live  $78.22  $150.91  $72.69  93%  115,438  $8,391,188.22 
J9045  Carboplatin  $39.50  $84.16  $44.66  113%  982,275  $43,868,401.50 
J9062  Cisplatin  $100.09  $182.01  $81.92  82%  61,788  $5,061,672.96 
J9181  Etoposide (10 mg)  $0.79  $13.22  $12.43  1573%  879,440  $10,931,439.20 
J9182  Etopisde (100 mg)  $7.84  $132.25  $124.41  1587%  181,322  $22,558,270.02 
J9185  Fludarbine phosphate  $110.70  $186.68  $75.98  69%  102,444  $7,783,695.12 
J9202  Goserelin acetate  $206.29  $389.98  $183.69  89%  329,988  $60,615,495.72 
J9214  Interferon, alfa-2b  $6.97  $10.74  $3.77  54%  1,112,282  $4,193,303.14 
J9217  Leuprolide acetate  $299.38  $513.60  $214.22  72%  1,286,664  $275,629,162.08 
J9265  Paclitaxel  $109.36  $173.50  $64.14  59%  895,067  $57,409,597.38 
J9293  Mitoxantrone HCl  $101.56  $179.56  $78.00  77%  121,358  $9,465,924.00 
J9390  Vinorelbine tartrate  $40.72  $61.47  $20.75  51%  350,891  $7,280,988.25 
K0121  Cyclosporine  $.88  $1.41  $.53  60%  15,326,735  $8,123,169.55 
K0503  Acetylcysteine**  $1.25  $6.73  $5.48  438%  1,861,345  $10,200,170.60 
K0504  Albuterol sulfate (concentrated)**  $0.06  $0.13  $0.07  117%  15,474,404  $1,083,208.28 
K0505  Albuterol sulfate (dose form)**  $0.12  $0.47  $0.35  292%  343,627,175  $120,269,511.25 
K0518  Ipratropium bromide**  $1.31  $3.34  $2.03  155%  29,505,931  $59,897,039.93 
K0523  Metaproterenol sulfate (concentrated)**  $0.18  $0.26  $0.08  44%  205,745  $16,459.60 
K0524  Metaproterenol sulfate (dose form)**  $0.52  $0.83  $0.31  60%  7,427,068  $2,302,391.08 
Q0136  Epoetin alpha  $6.74  $12.00  $5.26  78%  10,466,953  $55,056,172.78 
TOTAL  $1,028,225,229.46 
* Though code J9010 was deleted as of 12/31/96, there was still some billing of it in 1997. Currently, code J9000 is used for all Doxorubicin 
billing. The number of services listed does not reflect that all 1998 billing for J9010 will be subsumed under J9000. Therefore, potential savings 
are underestimated. 
** Coding changes for inhalation drugs went into effect on April 1, 1997. The number of services listed reflects 1997 utilization for the K-codes 
only, and therefore does not represent services billed under previous codes from January 1997 through March 1997. Potential savings are 
therefore underestimated for these 6 codes. 
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B - 1  A P P E N D I X  C

HEALTH CARE FINANCING ADMINISTRATION COMMENTS

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C - 1
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C - 2
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C - 3