Department  of Health  and Human Sefices 
OFFICE  OF 
INSPECTOR  GENERAL 
MEDICARE  PAYMENTS 
FOR NEBULIZER  DRUGS 
I  OFFICE OF INSPECTOR GENERAL 
The mission of the Office of Inspector General  (OIG), as mandated by Public Law 95-452, as 
amended, is to protect the integrity of the Department  of Health and Human Services (HHS) 
programs as well as the health and welfare of beneficiaries served by those programs.  This 
statutory mission is carried out through a nationwide network of audits, investigations, and 
inspections conducted by three OIG operating components:  the Office of Audit Services, the 
Office of Investigations, and the Office of Evaluation and Inspections.  The OIG also informs 
the Secretary of HHS of program and management problems and recommends courses to 
correct them. 
OFFICE OF AUDIT  SERVICES 
The OIGS Office of Audit Services (OAS) provides all auditing services for HHS, either by 
conducting audits with its own audit resources or by overseeing audit work done by others. 
Audits examine the performance of HHS programs and/or its grantees and contractors in 
carrying out their respective responsibilities and are intended to provide independent 
assessments of HHS programs and operations in order to reduce waste, abuse, and 
mismanagement and to promote economy and efficiency throughout  the Department. 
OFFICE OF INVESTIGATIONS 
The OIGS Office of Investigations (01) conducts criminal, civil, and administrative 
investigations of allegations of wrongdoing in HHS programs or to HHS beneficiaries and of 
unjust enrichment by providers.  The investigative efforts of 01 lead to criminal convictions, 
administrative sanctions, or civil money penalties.  The 01 also oversees State Medicaid fraud 
control units which investigate and prosecute fraud and patient abuse in the Medicaid program. 
OFFICE OF EVALUATION  AND  INSPECTIONS 
The OIGS Office of Evaluation and Inspections (OEI) conducts short-term management and 
program evaluations (called inspections) that focus on issues of concern to the Department, 
the Congress, and the public.  The findings and recommendations contained in these inspection 
reports generate rapid, accurate, and up-to-date information on the efficiency, vulnerability, 
and effectiveness of departmental  programs. 
This report was prepared in the Philadelphia Regional Office, under the direction of Thomas 
J. Robertson, Regional Inspector General for Audit Services, and Robert A  Vito, Regional 
Inspector General for Evaluation and Inspections.  Project Staff included: 
Philadelphia Region  Headquarters 
David Graf, Project Leade~ OAS  Mary Beth Clarke, B-ogramAnaZyst 
Robert A. Katz, ProgramAnalyst 
Cynthia R. Hansford, ProgramAssistant 
Neil Montavani, Intern  Depafiment  of Health  and Human Sefices 
OFFICE  OF 
INSPECTOR  GENEML 
MEDICARE  PAYMENTS

FOR NEBULIZER  DRUGS

$$SERVICE$ ~a+ 
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%>d~a oEI-03-94-00390  EXECUTIVE  SUMMARY

PURPOSE 
This  report  examines  differences  in the  reimbursement  methodologies  used  by the 
Medicare  and  Medicaid  programs  to pay for prescription  drugs,  focusing  on three 
inhalation  drugs  used  in nebulizers. 
BACKGROUND 
Medicare  does  not  generally  pay for outpatient  prescription  drugs.  However,  there 
are  several  exceptions  to this general  rule,  including  payment  for  drugs  used  in 
conjunction  with  medical  equipment.  For  such  drugs,  Medicare  computes  an allowed 
amount  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,  price  is based  on 
the  lower  of the  EAC  or the  median  of the  national  AWP  for all generic  sources. 
The  Medicaid  program  provides  coverage  for outpatient  prescription  drugs  as an 
optional  benefit.  Currently,  all States  provide  coverage  for  outpatient  prescription 
drugs.  Medicaid  payment  policies  for such  drugs vary across  States,  within  guidelines 
established  by the  Health  Care  Financing  Administration  (HCFA).  Many  States 
discount  the  AWP  to set  drug  prices.  The  Medicaid  program,  in addition,  uses  a 
rebate  program  to obtain  discounts  from  pharmaceutical  manufacturers. 
In this report,  we compare  Medicare  and  Medicaid  costs in  17 States  for three  drugs 
used  in conjunction  with nebulizers  by Medicare  beneficiaries  from  January  1994 
through  February  1995.  A nebulizer  is a medical  device  which  administers  drugs  for 
inhalation  therapy  for patients  with respiratory  conditions  such  as asthma  or 
emphysema.  Medicare  allowed  amounts  (which include  20 percent  copayments  by 
beneficiaries)  for nebulizer  drugs  remained  relatively  stable  between  1990 and  1992, 
never  exceeding  $74 million.  Allowed  amounts  increased  to $170 million  in 1993 and 
$226 million  in  1994, more  than  a 200 percent  increase  from  1990. 
FINDINGS 
l@&kare  and  b  ben#iciaries  paid  about  $37 millibn more for three nebulimrdregsin 17 
Statesthanthe amountthatMedicaidwouklhavepaidfor equivalentdiugs. 
We  found  that  over  $11.7 million  of the  higher  costs  are  attributable  to the 
method  Medicare  employs  to determine  prices  paid  to drug  suppliers,  and 
about  $25.3 million  is due  to the  lack  of a manufacturers  rebate  program, 
similar  to Medicaids. 
i  PotentialMedicaresavingsarenotrestited  to thethreenebulizerdrugsand17 States 
reviewed 
Because  of inherent  differences  in the  reimbursement  methodologies  followed

by Medicare  and  Medicaid,  the  potential  cost savings available  to Medicare  are

not,  in our  opinion,  restricted  to either  the  three  drugs  or the  17 States

included  in our  review.  For  instance,  if Medicare  had  revised  its drug  pricing

methodology  and  implemented  a manufacturers  rebate  program,  it and  its

beneficiaries  could  have  saved  about  $58 million  of the  $226 million  allowed  for

nebulizer  drugs  (excluding  administrative  costs)  in  1994.

Medicare  also  allowed  more  than  $1 billion  for other  drugs  in 1994.  We

estimate  that  Medicare  and  its beneficiaries  could  have  saved  about  $83 million

for these  drugs  had  Medicares  drug  pricing  methodology  been  revised.

Furthermore,  had  there  been  a drug  rebate  program  in effect,  the  estimated

savings could  have  increased  even  more  substantially.

RECOMMENDATIONS 
We recommend that HCFA reexamine its Medicare drug reimbursement 
methodologieswith a goal of reducing payments as appropriate. 
Our  study  demonstrated  that  Medicare  could  have  saved  millions  by discounting  the

wholesale  price  and  establishing  a rebate  program.  We recognize,  however,  that  other

cost saving options  are  available.  One  or more  of the  following  options  should  be

aggressively  pursued  to save Medicare  funds  and  to place  this program  on par  with

Medicaid  and  other  payers  in obtaining  competitive  pricing  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  identify  the  manufacturer  or indicate  if the  drug  is a brand  name  or a generic

equivalent,  information  that  is needed  to discount  the  AWP  and  obtain  a rebate  for a

specific  drug.  Medicaid  uses  the  National  Drug  Code  (NDC)  in processing  drug

claims.  The  NDC  identifies  the  manufacturer  and  reflects  whether  the  drug  is a brand

name  or a generic  equivalent.

Manufacturers  Rebates

Medicare  could  develop  a legislative  proposal  to  establish  a mandated  manufacturers

rebate  program  similar  to Medicaids  rebate  program.  We  recognize  that  HCFA  does

not  have  the  authority  to simply establish  a mandated  manufacturers  rebate  program

11  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 
to Medicaid  make  the  drugs  that  are  used  by Medicare  beneficiaries  and  paid  for by 
the  Medicare  program. 
Com~etitive  Bidding 
Medicare  could  develop  a legislative  proposal  to allow it to take  advantage  of its 
market  position.  While  competitive  bidding  is not  appropriate  for every  aspect  of the 
Medicare  program  or in every  geographic  location,  we believe  that  it can be  effective 
in many  instances,  including  the  procurement  of drugs.  Medicare  could  ask 
pharmacies  to  compete  for business  to provide  Medicare  beneficiaries  with 
prescription  drugs.  All types  of pharmacies  could  compete  for Medicare  business, 
including  independents,  chains,  and  mail-order  pharmacies. 
Inherent  Reasonableness 
Since  Medicares  guidelines  for  calculating  reasonable  charges  for drugs  result  in 
excessive  allowances,  the  Secretary  can use her  inherent  reasonableness  authority  to 
set special  reasonable  charge  limits.  If this option  is selected,  however,  it will not  be 
effective  unless  the  Secretarys  authority  to reduce  inherently  unreasonable  payment 
levels  is streamlined.  The  current  inherent  reasonableness  process  is resource 
intensive  and  time  consuming,  often  taking  two to four  years  to implement.  Medicare 
faces  substantial  losses  in potential  savings--certainly  in the  millions  of dollars--if 
reduced  drug  prices  cannot  be  placed  into  effect  quickly. 
Acquisition  Cost 
Medicare  could  base  the  payment  of drugs  on the  EAC.  The  Durable  Medical 
Equipment  Regional  Carriers  (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. 
Our  work  regarding  drugs  reimbursed  by Medicare  is continuing.  We will explore 
reasons  for the  sharp  increase  in reimbursement  for nebulizer  drugs  that  occurred  in 
1993 and  1994.  We will also  determine  the  actual  prices  drug  suppliers  pay for 
nebulizer  drugs.  Finally,  we will examine  other  drugs  Medicare  reimburses  to ensure 
that  they  are  properly  priced,  and  to validate  our  premise  that  the  differences  inherent 
in the  reimbursement  methodologies  of Medicare  and  Medicaid  cause  Medicare  to 
pay more  for drugs  than  Medicaid,  regardless  of the  type  of drug  or where  Medicare 
beneficiaries  reside, 
111  AGENCY  COMMENTS 
The  HCFA  concurred  with our  recommendation  and  is currently  examining  available 
options  in an effort  to make  appropriate  drug  payment  reductions.  The  HCFA 
expects  by early  1996 to reach  a decision  on whether  to proceed  with  a legislative 
proposal  or to revise  current  regulations.  The  full text  of HCFAS comments  can be 
found  in Appendix  B. 
iv  TABLE  OF  CONTENTS

PAGE 
EXE~  S~Y 
. . . . . .  1

~ODU~ON  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

. . . . . . ..  . .  6

~INGS  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 
. . . . . . . .
 6 

Medicare~edicaid  Comparison  . . . . . . . . . . . . . . . . . . . . . . . . . . . . 
. . . . . . 7

Pricing  Method  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

9

Manufacturers  Rebate  Program  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

. . . . . . 9


Additional  SatingsPossible  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

..11

~CO-~A~ONS....o.......  . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

.  A-1

APW~~k  Cost  Comparison  Notes  . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

.  B-1

APPEND~B:  HCFAComments  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
 INTRODUCTION

PURPOSE 
This report  examines  differences  in the  reimbursement  methodologies  used  by the 
Medicare  and  Medicaid  programs  topay  for prescription  drugs,  focusing  onthree 
inhalation  drugs  usedin  nebulizers. 
BACKGROUND 
Anebulizeris  atype  of durable  medical  equipment  (DME)  through  which 
prescription  drugs  areadministered  for inhalation  therapy.  Itconsists  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 respirato~  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. 
Medicaretiogram 
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,  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.

In June  1992, the  Health  Care  Financing  Administration  (HCFA)  issued  a final  rule

designating  four  Durable  Medical  Equipment  Regional  Carriers  (DMERCS)  to process

all claims  for durable  medical  equipment,  prosthetics,  orthotics,  and  supplies,  including

nebulizer  drugs.  Effective  October  1, 1993, the  DMERCS  replaced  more  than  50 area

carriers  which  had  previously  processed  DME  claims.  The  geographical  areas

formerly  serviced  by the  carriers  were  phased  in under  the  DMERCS  on a staggered

basis.  The  DMERCS  issue identical  coverage  policies  to  ensure  consistency  in

Medicare  guidelines.  The  four  DMERCS  are:

.	 MetraHealth  in Wilkes-Barre,  Pennsylvania  (hereafter  referred  to as DMERC 
A).  This DMERC  processes  claims  for nebulizer  drugs  for Medicare 
beneficiaries  residing  in 10 States. 
.	 AdminaStar  Federal  Inc. in Indianapolis,  Indiana  (hereafter  referred  to as 
DMERC  B).  This DMERC  processes  claims  for Medicare  beneficiaries  in nine 
States  and  the  District  of Columbia. 
1
 .	 Palmetto  Government  Benefits  Administrators  in Columbia,  South  Carolina 
(hereafter  referred  to  as DMERC  C).  This DMERC  processes  claims  for 
Medicare  beneficiaries  in 14 States,  Puerto  Rico,  and  the  Virgin  Islands. 
*	 Connecticut  General  Life in Nashville,  Tennessee  (hereafter  referred  to as 
DMERC  D).  This  DMERC  processes  claims  for Medicare  beneficiaries  in 17 
States  and  three  territories. 
According  to42  Code  of Federal  Regulations  405.517, Medicare  prices  drugs  based  on

the  lower  of an Estimated  Acquisition  Cost  (EAC)  ora  national  Average  Wholesale

Price  (AWP).  The  resulting  allowed  amount  is the  price  that  Medicare  and  its

beneficiaries  pay  a drug  supplier.  If a drug  has multiple  sources  (as do the  three

nebulizer  drugs  included  in this review),  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  The  Red  Book  or similar  price  listings used  in the  pharmaceutical

industry.

Pharmacies  or DME  suppliers  (hereafter  referred  to as drug  suppliers)  generally  bill

Medicare  for nebulizer  drugs  using 20 J procedure  codes  which were  implemented  in

late  1993.  The  J codes  identi~  the  product,  but  not  the  manufacturer  and,

therefore,  not whether  the  dispensed  drug  is a brand-name  drug  or generic  equivalent.

Prior  to the  use  of J codes,  procedure  code  A4610--defined  as medical  supplies--

was used.

According  to HCFA  Part  B data,  Medicare  allowed  amountsl  for nebulizer  drugs

remained  relatively  stable  during  Calendar  Years  (CYS) 1990 through  1992, never

exceeding  about  $74 million  annually.  In CY  1993 the  allowed  amounts  jumped  to

about  $170 million,  and  rose  to about  $226 million  in CY  1994--an  increase  of over

200 percent  from  CY  1990.  During  the  14-month  period  of our  review--January  1,

1994 through  February  28, 1995, the  allowed  amounts  for nebulizer  drugs  totaled

about  $269 million.

Medicaidl?ogram 
State  Medicaid  agencies  generally  reimburse  drug  suppliers  per  prescription  with the 
amount  of reimbursement  varying  by drug.  Each  State  agency  has the  authority  to 
develop  its own reimbursement  formula  for prescription  drugs,  including  recipient 
copayments,  subject  to upper  payment  limits  established  by HCFA.  For  the  drugs  that 
1 The allowed amount represents the total amount of the payment for the drug.  Medicare 
pays 80 percent of the allowed amount and the beneficiaries pay the remaining 20 percent. 
2  we reviewed,  the  State  Medicaid  Manual,  Section  6305.1 B states  that  payments  for 
drugs  must  not  exceed,  in the  aggregate,  prices  determined  by applying  the  lower  of 
the  EAC,  plus  a reasonable  dispensing  fee,  or the  providers  usual  and  customary 
charges  to the  public.  Many  States  also use  a discounted  AWP  to set  drug  prices. 
Drug  suppliers  bill prescription  drugs  to the  State  Medicaid  agency  using a national 
drug  code  (NDC).  The  NDC  identifies  the  firm  that  manufactures  or distributes  the 
drug  along with  the  drugs characteristics.  The  NDC  also indicates  if a drug  is a brand 
name  or a generic  equivalent.  Thus,  unlike  a State  Medicaid  agency,  a DMERC 
cannot  differentiate  between  brand  and  generic  drugs. 
With  the  enactment  of the  Omnibus  Budget  Reconciliation  Act  of 1990 (OBRA  90), 
Public  Law  101-508, enacted  November  5, 1990, pharmaceutical  manufacturers  are 
required  to  enter  into  and  have  rebate  agreements  in effect  with  all State  Medicaid 
agencies  for  drugs  dispensed  to Medicaid  recipients.  Manufacturers  must  have  a 
completed  rebate  agreement  in effect  for their  products  to be  eligible  for inclusion  in 
the  Medicaid  program.  For  CY  1994, quarterly  rebates  for  innovator  multiple  source 
drugs  (that  is, brand  name  drugs)  were  based  on the  greater  of 15.4 percent  of 
Average  Manufacturer  Price  (AMP)2  or the  difference  between  the  AMP  and  Best 
Price.3  For  non-innovator  (generic)  multiple  source  drugs,  the  rebate  was  11 percent 
for CY  1994.  The  Medicare  program  does  not  use rebate  agreements  to reduce  the 
cost  of covered  drugs  dispensed  to Medicare  beneficiaries. 
ReliuedWorkby theOf&e of InspectorGeneral 
We  recently  issued  a report  entitled,  Medicare Part B--Reimbursement  To Providers For 
Drugs Used In Conjunction  Wi~hDurable Medical  Equipment  (CIN-A-06-92-00079).  In 
this study, we found  that  HCFA  lacked  clear  legislative  authority  to  cover  self-
administered  outpatient  prescription  drugs.  Additionally,  we concluded  there  was no 
assurance  that  substantial  amounts  of drugs were  properly  priced  and  paid  because 
HCFA  did not  require  carriers  to obtain  detailed  pricing  information.  We 
recommended  HCFA  seek  legislation  to expressly  authorize  the  coverage  of drugs 
used  with  DME  and  implement  policies  and  procedures  to ensure  that  carriers 
properly  price  and  pay prescription  drugs. 
METHODO~GY  AND SCOPE 
Our  objectives  for this review  were  to identify  differences  in the  reimbursement 
methodologies  used  by the  Medicare  and  Medicaid  programs  to pay for prescription 
2 AMP is the average price paid by wholesalers for products distributed to the retail class 
or trade. 
3 Best Price is the lowest price paid by any purchaser (exclusive of depot prices and single-
award contract prices as defined by any Federal agency) and includes products with special 
packaging, labeling, or identifiers. 
3  drugs,  and  to estimate  the  additional  costs incurred  by the  Medicare  program  and  its 
beneficiaries  forthree  selected  nebulizer  drugs.  Ourreview  includes  Medicare  and 
Medicaid  payments  for nebulizer  drugs  for the  period  January  1,1994  through 
February  28, 1995. 
We  reviewed  HCFAS  policies  and  procedures  concerning  Medicare  and  Medicaid 
reimbursement  for  drugs.  We  obtained  the  Medicare  information  we needed  to 
achieve  our  objectives  from  HCFAS National  Claims  History  (NCH)  One  Percent 
Sample  file and  the  DMERCS  responsible  for processing  nebulizer  drug  claims.  Using 
the  NCH,  we obtained  drug  claims  for  20 J codes  used  for nebulizer  drugs.  We 
grouped  the  claims  by J code  and  by the  State  of beneficiary  residence.  We  then 
selected  the  three  nebulizer  drugs with the  highest  allowed  amounts:  (1) Albuterol 
Sulfate,  0.083%,  hereafter  referred  to  as Albuterol  Sulfate;  (2) Metaproterenol  Sulfate, 
0.4%;  and  (3) Metaproterenol  Sulfate,  0.6%.  Projecting  the  allowed  amounts  obtained 
from  the  NCH  to the  universe  of nebulizer  drugs, we determined  that  the  three 
selected  drugs  totaled  about  $211.7 million,  or about  79 percent  of the  $269 million 
allowed  for  all nebulizer  drugs.  Albuterol  Sulfate  accounted  for  $182.3 million  of the 
allowed  amounts. 
We then  selected  17 States4  (based  on the  beneficiaries  States  of residence)  with the 
highest  allowed  amounts  for nebulizer  drugs,  and  grouped  these  States  under  their 
servicing  DMERC,  as shown below: 
STATES  AND SERVKXNG  DMERCs INCLUDED  IN REVIEW 
I 
DMERC  A  DMERC  B  DMERC  C  DMERC  D 
I I )  I 1 
New	 York  Illinois  Alabama  Louisiana  California 
1 
I 
Pennsylvania  Michigan  Arkansas  Mississippi  Missouri 
\  I  I  1
Ohio  Florida  North  Carolina  Washington 
Georgia  Texas 
I  I Kentuc@ 
4  Puerto  Rico,  Tennessee,  and  Arizona  were  originally  included  in the  top  States 
for review.  However,  reimbursement  information  was not  available  for Puerto  Rico 
from  HCFAS Medicaid  Drug  Rebate  Initiative  (MDRI)  system,  and  Arizona  and 
Tennessees  Medicaid  programs  are  operated  by several  managed  care  programs.  The 
MDRI  system  assists  HCFA  in monitoring  the  manufacturers  rebate  program.  The 
system  calculates  rebate  amounts  for individual  drugs,  and  transmits  these  amounts  to 
the  Medicaid  agencies  for use in invoicing  drug manufacturers.  Each  managed  care 
program  operates  independently  and  sets their  own fees  and  payments.  Therefore, 
Puerto  Rico,  Tennessee,  and  Arizona  were  excluded  from  our  review. 
4  We  projected  that  the  Medicare  beneficiaries  in the  17 selected  States  accounted  for 
about  $146.9 million  or about  69 percent  of the  $211.7 million  in allowed  amounts  for 
the  three  nebulizer  drugs  from  January  1, 1994 through  February  28, 1995.  We 
obtained  actual  allowed  prices  per  milliliter  (ml)  for the  three  selected  nebulizer  drugs 
throughout  the  period  of our  review  from  the  DMERCS.  We  used  these  prices,  which 
include  the  beneficiary  copayments,  in our  comparisons  to Medicaid. 
We  obtained  the  Medicaid  information  we needed  to achieve  our  objectives  from  the 
MDRI  system,  and  from  contacts  with  the  17 State  Medicaid  agencies  concerning  their 
dispensing  fees  and  recipient  copayment  amounts.  We  factored  the  dispensing  fees 
and  copayment  amounts  into  our  computations  of the  Medicaid  price  per  ml.  For 
information  on how we compared  the  costs  of the  three  selected  nebulizer  drugs  for 
the  Medicare  and  Medicaid  programs,  see  Appendix  A. 
This  review  is part  of Operation  Restore  Trust,  an initiative  combining  the  forces  of 
multiple  agencies  to combat  Medicare  and  Medicaid  fraud,  waste,  and  abuse  in 
California,  Florida,  Illinois,  New York,  and  Texas.  Together,  these  States  account  for 
40 percent  of the  nations  Medicare  and  Medicaid  beneficiaries. 
This  inspection  was conducted  in accordance  with  the  Quality Standards for Inspections 
issued  by the  Presidents  Council  on Integrity  and  Efficiency. 
5
 FINDINGS

MEDICARE  AND ITS BENEFICIARIES  PAID ABOUT  $37 MILLION MORE 
FOR THREE  NEBULIZER  DRUGS IN 17 STATES THAN THE  AMOUNT 
MEDICAID WOULD  HAVE  PAID FOR EQUIVALENT  DRUGS. 
During  the  period  under  review,  January  1, 1994 through  February  28, 1995, Medicare 
and  its beneficiaries  paid  about  $37 million  more  for three  nebulizer  drugs  in 17 States 
than  the  amount  Medicaid  would  have  paid  for  equivalent  drugs. 
Two  significant  differences  in the  drug  reimbursement  methodologies  used  by the 
Medicare  and  Medicaid  programs  caused  Medicare  and  its beneficiaries  to pay more 
for the  nebulizer  drugs.  One,  Medicare  allowed  a higher  price  to drug  suppliers  for 
two of the  three  drugs  reviewed  because  of the  manner  in which  it used  the  AWP  to 
determine  the  drug  price.  This  resulted  in increased  costs to the  Medicare  program  of 
over  $11.7 million.  Because  Medicare  beneficiaries  are  required  to make  a copayment 
of 20 percent  for selvices  received  under  Medicare,  beneficiaries  also had  to absorb  a 
portion  of the  higher  drug  prices.  Second,  Medicare  does  not  have  a manufacturers 
rebate  program  similar  to Medicaids.  This  resulted  in increased  costs to the  Medicare 
program  OFabout  $25.3 million.  The  following  table  illustrates  the  higher  costs of the 
three  nebulizer  drugs  to the  Medicare  program  resulting  from  differences  in the  drug 
reimbursement  methodologies. 
Higher  Cost  of Medicare  Drugs  Due  To: 
Nebulizer  Drugs 
Reviewed  Higher  Prices  Paid  Lack  of Manufacturers  Total 
to Drug  Suppliers  Rebate  Program 
Albuterol  Sulfate  $11,265,556  $22,870,051  $34,135,607 
Metaproterenol  Sulfate  (6,341)  1,614,042  1,607,701 
0.4% 
Metaproterenol  Sulfate  447,731  816,856  1,264,587 
0.6% 
Totals  $11,706,946  $25,300,949  $37,007,895 
Percentage  32%  68%  100% 
6
 Nebulizerdrugreimbursementscouldbe reduced byallowingDMERCS the optionof 
basingprices on the lowerof either a discountedAWP for the drugdispensedor the 
median of the AWP for all generic sources. 
Medicare  and  its beneficiaries  paid  drug  suppliers  over  $11.7 million  more  than  the 
amount  that  Medicaid  would  have  paid  for equivalent  drugs.  The  higher  payments  to 
the  drug  suppliers  were  caused  by Medicare  using  the  median  of the  national  AWP  for 
all generic  sources  versus  Medicaids  method  of discounting  the  AWP. 
The  State  Medicaid  Manual,  Section  6305.1 B states  that  payments  for drugs  must  not 
exceed,  in the  aggregate,  payment  levels  determined  by applying  the  lower  of the 
EAC,  plus  a reasonable  dispensing  fee,  or the  providers  usual  and  customary  charges 
to the  public.  The  Manual  further  states  that  in the  past  many  States  based  the  EAC 
upon  the  AWP,  but  that  a number  of studies  have  shown that: 
...there is a preponderance  of evidence that demonstrates  that such A WP 
levels overstate the prices that pharmacists  actually pay for drug products  by 
as much as 10-20 percent  because they do not reflect dkcounts, premiums, 
special offe~  or incentives, etc.  Consequently, wi~hout valid documentation 
to the contrary, a published A WP level as a State determination  of EAC 
without a significant discount being applied k not an acceptable  estimate  of 
prices generallv and current~ paid  by providers.  
In general,  the  four  DMERCS  developed  Medicare  drug  prices  using the  median  AWP 
for the  generic  drug  equivalent  of the  drugs being  purchased.  Thirteen  of 17 State 
Medicaid  agencies  discounted  the  AWP  an average  of 9.6 percent  in pricing  drugs  as 
suggested  by the  State  Medicaid  Manual.  Two other  State  agencies  used  the 
Wholesale  Acquisition  Cost  (WAC)  plus  a percentage  of the  WAC  as the  basis  for 
pricing  drugs.  Only two State  Medicaid  agencies  based  drug  prices  on the  AWP. 
These  differences  in computing  drug  prices  resulted  in Medicare  and  its beneficiaries 
paying  over  $11.7 million  more  than  the  17 State  Medicaid  agencies  included  in our 
review,  as shown  on the  following  page. 
7
 I  DMERCS 
ebulizer  Drugs  Total 
A  B  c  D 
Reviewed 
Albuterol  ($115,086)  $1,627,822  $8,929,695  $823,125  $11,265,556 
Sulfate 
Metaproterenol  (23,595)  $  6,750  $  10,504  0  (6,341) 
Sulfate,  0.4% 
1 
Metaproterenol  (90,432)  $  41,887  $  419,539  $76,737  447,731 
Sulfate, 
0.6% 
I 
Totals  ($229,113)1  $1,676,454  $9,359,7381  $899,8621  $ll,706,94~\ 
The  above  table  shows that  pricing  drugs  in amanner  similar  to the  17 State  Medicaid

agencies  would  not  always result  in a savings foreach  DMERC  or for  each  drug.

DMERC  A would  actually  have  allowed  $229,113 more  than  its two State  Medicaid

agency  counterparts  because  both  State  agencies  based  their  prices  on the  AWP  of the

drugs  dispensed  rather  than  on a discounted  AWP  as indicated  in the  State  Medicaid

Manual.  We  also noted  that  some  of the  other  State  Medicaid  agencies  paid  more  for

Metaproterenol  Sulfate,  0.4%,  (six State  agencies)  and  Metaproterenol  Sulfate,  0.6%,

(seven  State  agencies)  primarily  because  of the  number  of brand  name  drugs

dispensed  (the  discounted  AWP  in these  cases was higher  than  the  median  of the

national  AWP  for all generic  sources).

Because  the  practice  of basing  Medicare  drug  prices  on Medicaid  drug  prices  paid  to

drug  suppliers  does  not  always result  in a lower  price  than  Medicares  current  method

of using the  median  of the  national  AWP  for  all generic  sources,  we believe  the

optimum  approach  to revising  Medicares  pricing  methodology  would  allow DMERCS

the  option  of using  either  of the  two pricing  methods  that  would  result  in lower  costs

to the  Medicare  program  and  its beneficiaries.  Had  this option  been  available  to the

four  DMERCS,  we estimate  that  Medicare  and  its beneficiaries  could  have  saved  an

additional  $400,000 bringing  the  total  savings to $12.1 million.

8
 The cost of nebulizer drugs to the Medicare program could be further reduced by 
establishinga manufacturersrebate program similarto Medicaid%. 
The  lack  of a manufacturers  rebate  program  caused  Medicare  to pay about  $25.3 
million  more  for the  three  drugs  than  the  amount  that  Medicaid  would  have  paid  for 
equivalent  drugs. 
We  reviewed  data  contained  in the  MDRI  system  for the  17 State  Medicaid  agencies 
included  in our  review.  This  data  is grouped  by manufacturer  and  product  code  and 
includes  information  on the  rebate  amount  per  unit,  total  units  dispensed,  and  total 
rebate  amounts  claimed.  Using  this  data,  we were  able  to determine  the  amount  of 
the  rebate  per  ml that  each  State  agency  received  for the  three  nebulizer  drugs 
reviewed.  We  applied  the  rebate  amount  to the  number  of mls paid  for by Medicare. 
As shown below,  all four  DMERCS  would  have  reduced  their  drug  costs had  a 
manufacturers  rebate  program  been  in effect  for Medicare. 
L
DMERCS

Nebulizer  Drugs  Total 
A B  c  D 
Reviewed
Albuterol  Sulfate
 $1,899,860  $4,060,684  $11,905,347  $5,004,160  $22,870,051 
Metaproterenol
 78,650  8,250  1,527,115  27  1,614,042 
Sulfate,  0.4%

Metaproterenol
 199,426  79,300  412,527  125,603  816,856 
Sulfate,

0.6%

Totals
 $2,177,936  $4,148,234  $13,844,989  $5,129,790  $25,300,949 
POTENTIAL  MEDICARE  SAVINGS ARE  NOT RESTRICTED  TO THE  THREE 
NEBULIZER  DRUGS AND 17 STATES REVIEWED. 
This  review  showed  that  Medicare  and  its beneficiaries  paid  a net  of about  $37 million 
more  for three  nebulizer  drugs  than  the  amount  that  the  17 State  Medicaid  agencies 
would  have  paid  for equivalent  drugs because  of the  manner  in which  Medicare  priced 
drugs  and  the  absence  of a manufacturers  rebate  program.  Because  these  NO 
differences  are  inherent  in the  reimbursement  methodologies  followed  by Medicare 
and  Medicaid,  the  potential  cost savings  available  to Medicare  are  not,  in our  opinion, 
restricted  to the  three  drugs  or the  17 States  included  in our  review. 
9  For  example,  26 State  Medicaid  agencies  not  in our  review  reported  that  they  discount 
the  AWP  an average  of about  9 percent  in determining  drug  prices.  Only three  State 
agencies  not  in our  review  reported  using  the  AWP  as the  basis  for determining  drug 
prices.  Thus,  allowing  DMERCS  the  option  of using a discounted  AWP  like their 
State  Medicaid  agency  counterparts  could  result  in cost  savings in many  of the  26 
States  that  base  prices  on a discounted  AWP. 
As noted  earlier,  Medicare  allowed  about  $226 million  for the  20 nebulizer  drugs  in 
1994.  If Medicare  had  revised  its drug  pricing  methodology  and  implemented  a 
manufacturers  rebate  program,  about  $58 million  of the  $226 million  allowed  for 
nebulizer  drugs  (excluding  administrative  costs)  in  1994 could  have  been  saved. 
Medicare  also allowed  more  than  $1 billion  for other  drugs  in 1994.  We  estimate  that 
Medicare  and  its beneficiaries  could  have  saved  about  $83 million  had  Medicares  drug 
pricing  methodology  been  revised.  Furthermore,  had  there  been  a drug  rebate 
program  in effect,  the  estimated  savings could  have  increased  even  more  substantially. 
10
 RECOMMENDATIONS

We recommend that HCFA reexamine its Medicare drug reimbursement 
methodologieswith a goal of reducing payments as appropriate. 
Our  report  demonstrates  that  Medicare  could  have  saved  millions  by discounting  the

wholesale  price  and  establishing  a rebate  program.  We  recognize,  however,  that  other

cost saving  options  are  available.  One  or more  of the  following  options  should  be

aggressively  pursued  to save Medicare  funds  and  to place  this program  on par  with

Medicaid  and  other  payers  in obtaining  competitive  pricing  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  identify  the  manufacturer  or indicate  if the  drug  is a brand  name  or a generic

equivalent,  information  that  is needed  to discount  the  AWP  and  obtain  a rebate  for a

specific  drug.  Medicaid  uses the  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

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

11  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. 
Accwisition  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. 
AGENCY  COMMENTS 
The  HCFA  concurred  with  our  recommendation  and  is currently  examining  available 
options  in an effort  to make  appropriate  drug  payment  reductions.  The  HCFA 
expects  by early  1996 to reach  a decision  on whether  to proceed  with  a legislative 
proposal  or to revise  current  regulations.  The  full text  of HCFAS  comments  maybe 
found  in Appendix  B. 
12
 APPENDIX  A

COST COMPARISON NOTES 
The  objectives  of this review were  to identify  differences  in the  reimbursement

methodologies  used  by the  Medicare  and  Medicaid  programs  to pay for three

nebulizer  drugs.  In estimating  the  costs incurred  as a result  of the  different

reimbursement  methodologies,  we considered:  (1) the  difference  in the  price  of a

drug  paid  to drug  suppliers,  and  (2) manufacturers  rebates  received  by the  State

agencies  which  lower  the  overall  cost  of the  drug  to the  Medicaid  program.  We  also

computed  potential  cost savings if  (1) DMERCS  had  the  option  of basing  the  price

paid  to  a drug  supplier  on a discounted  AWP,  and  (2) a manufacturers  rebate

program  had  been  in effect.

We  used  HCFAS NCH  to select  the  three  drugs  paid  by Medicare,  and  the  17 States

(based  on the  State  where  the  beneficiaries  dispensed  the  drugs  resided)  included  in

this review.  The  selections  were  based  on allowed  amounts.  We  did not,  however,

use the  allowed  amounts  on the  NCH  to determine  the  drug  price  per  ml paid  by the

four  DMERCS.  The  allowed  amounts  on the  NCH  were  high because  carriers

continued  to pay claims  as DMERC  operations  were  being  phased  in.  Rather  than

use the  higher  prices  paid  by the  carriers  in comparing  Medicare  to Medicaid,  we

obtained  allowed  amounts  per  ml from  the  DMERCS  for each  of the  selected

nebulizer  drugs  during  the  period  of our review.  We  used  the  allowed  amounts,  which

is the  price  paid  by Medicare  and  its beneficiaries,  in making  our  program

comparisons.

To  determine  the  prices  paid  to drug  suppliers  by the  17 State  Medicaid  agencies,  we

first identified  all Medicaid  NDCS for the  three  nebulizer  drugs  in our  review  from  the

1994 edition  of a published  national  drug  compendium  (for  example,  there  were  19

NDCS listed  in the  compendium  for Albuterol  Sulfate).  We  then  used  two basic

sources  to  compute  Medicaid  drug  prices.  From  the  MDRI  system, we obtained:

(1) the  total  amount  that  the  17 State  Medicaid  agencies  reimbursed  drug  suppliers

for each  of the  three  selected  nebulizer  drugs;  (2) total  drug  mls dispensed  for each

drug;  and  (3) total  number  of prescriptions  for  each  drug.  (Typically,  nebulizer  drugs

are  dispensed  in vials which  contain  three  mls of the  product.)  From  contacts  with the

State  Medicaid  agencies,  we identified:  (1) the  dispensing  fee  per  prescription  that

the  State  agencies  included  in their  payments  to drug  suppliers  for the  period  of our

review,  and  (2) copayment  amounts  that  each  recipient  must  pay  drug  suppliers  for

nebulizer  drugs.

Using  this information,  we calculated  the  price  that  each  of the  17 State  Medicaid

agencies  would  have  paid  to drug  suppliers  for the  three  nebulizer  drugs,  as shown

below.

A-1
 1.	 We  recorded  the  total  reimbursable  amount  paid  to drug  suppliers  by a State 
agency  for a NDC  as shown  on the  MDRI  system. 
2.(cid:1) We  subtracted  from  the  total  reimbursable  amount  the  total  dispensing  fees 
paid  to the  drug  suppliers.  We  computed  the  total  dispensing  fees  by 
multiplying  the  number  of prescriptions  per  NDC  as shown  on the  MDRI 
system  by the  State  Medicaid  agencys dispensing  fee  per  prescription.  This 
step  was needed  to separate  the  cost of the  drug  from  the  professional 
dispensing  fee, both  of which were  lumped  together  in the  State  agency 
payment  to the  drug  supplier. 
3.	 We  added  to the  total  reimbursable  amount  the  total  copayments  that  were  the 
responsibility  of the  Medicaid  recipients.  We  computed  this  total  by multiplying 
the  number  of prescriptions  as shown  on the  MDRI  system  by the  copayment 
amount  provided  by each  State  agency.  This  step  was necessary  to  arrive  at 
total  reimbursable  amounts  paid  to drug  suppliers  by both  the  State  agencies 
and  the  recipients  who  shared  in the  payments. 
4.	 We  divided  total  reimbursable  amounts  paid  to drug  suppliers  as computed 
above  by the  total  mls dispensed  as shown  on the  MDRI  system  to arrive  at the 
price  paid  to drug  suppliers  per  ml.  We  consider  this the  total  price  of the 
drug  per  ml paid  to the  drug  supplier  by a State  Medicaid  agency. 
We  then  applied  the  difference  between  the  Medicare  price  per  ml paid  by the  four 
DMERCS  and  the  Medicaid  price  per  ml paid  by the  17 State  Medicaid  agencies  to 
the  volume  of drugs  reimbursed  by Medicare,  per  the  NCH.  The  comparison  showed 
that  Medicare  paid  over  $11.7 million  more  than  the  amount  that  the  17 State 
Medicaid  agencies  would  have  paid.  In making  the  above  computations,  we had 
pricing  data  for  the  entire  14-month  period  of our  review  for Medicare,  but  only 9 
months  for Medicaid.  We,  therefore,  compared  the  9-month  Medicaid  data  against 
Medicare  data  for both  a 9-month  and  14-month  period,  and  used  the  most 
conservative  results  (that  is, the  lowest  Medicare  price  regardless  of the  time  period). 
The  actual  cost  of a drug  to the  Medicaid  program  is lessened  by quarterly  rebates 
provided  by drug  manufacturers.  To  arrive  at this  cost to the  Medicaid  program,  we 
subtracted  from  the  total  price  per  ml paid  to drug  suppliers  by a State  agency  (as 
computed  in step  4 above)  the  rebate  amount  per  ml as shown in the  MDRI  system. 
We  then  compared  this amount  to the  Medicare  price  per  ml paid  to drug  suppliers  to 
determine  the  total  amount  that  Medicare  paid  in excess  of the  cost of the  drugs  to 
the  Medicaid  program  after  the  rebate  was factored  in. 
We  determined  that  the  Medicare  program  and  its beneficiaries  paid  about  $37 
million  more  for the  three  nebulizer  drugs  than  the  amount  that  Medicaid  would  have 
paid  for the  drugs.  This  excess  cost  could  have  been  avoided  had:  (1) the  four 
A-2
 Comments of the Health Care Financing Administration (HCFA)on office  of 
Insmctor  General (01(3) Drafl ReDort Me&care Pavrnents for Nebuliier  Drum. 
(oEI-03-94-oo390\ 
OIGRecommendation

HCFA should reexamine itslMedicare drug reimbursement methodologies with a goal of reducing

payments as appropriate.

HCFA ResDonse

We appreciate the list of options fbrnished by OIG and are currently examining all options

available in an effort to make appropriate  drug payment reductions.  The list of options finished

by OIG focuses on legislative and regulatory changes to our current drug payment policy.  We are

currently focusing on a number of options and expect to reach a decision early next year on

whether to proceed with a legislative proposal or to develop a revision to our current regulations.

Discounted Wholesale Price

We examined ways of reducing payments for many drugs, including nebulizers.  As an initial step

toward this optio~  we are developing a crosswalk between the current HCFA common procedure

coding system and the National Drug Code (NDC).  In the near fiture,  this development will

enable HCFA operations to process claims using the NDC, which identifies the drug,

manufacturer, and packaging.  By using this additional information provided by the NDC, we can

reduce drug payments by basing them on the lower of a dkcounted  Average Wholesale Price

(AWP) or the medhm of the AWP for all generic sources.

Manufacturers Rebates/Competitive  Bidding

These options involve proposing legislation to mandate a Manufacturers Rebate Program

similar to Medicaids rebate program and to allow for competitive bidding.  As part of the

Medicare drug benefit proposed in the Administrations health care reform bill, we put forward

both a manufacturers rebate program and discounted wholesale pricing.  All drugs covered under

Medicare Part B would have been sHkcted by these new payment rules.  We are currently

examining the issues involved in adopting the drug prices available to M~lcaid  through its rebate

program.  We are also developing a competitive bidding demonstration for certain durable

medical equipment, prosthetics,  md orthotics (DMEp(3S) incluclhg nebulizers and bronchodilator

drugs.

Inherent Reasonableness

We agree that the Secretarys authority to make inherent reasonableness payment changes for

DMEPOS should be simplified.  IJnder current law, only the secretary  can determine whether

Medicare payments for DMEPC)S are grossly excessive or deficient and propose the necessary

payment changes.  Prior to the Omnibus Budget Reconciliation Act of 1987, Medicare carriers

had the authority to propose inherent reasonableness payment changes for DMEPOS.  h  this

regard, we believe that inherent reasonableness authority should be restored to Medicares
  ,* ,Iwlc,,  ~ 
*+  $*  Health  Care Financing  Administration 
~   DEPARTMENTOFHEALTH& HUMANSERVICES 
:
:.
% 
+44.>	. ,,,0  The  Administrator 
Washington,  D.C.  20201 
TO(cid:1) June  GibbsBrown 
Inspector  General 
FROM	 Bruce  C. Vladec 
Administrator 
SUBJECT(cid:1) Office of Inspector General M  lleporE  %ledicae  Payments for 
Nebulizer Drugs,  (OEI-03-94-O0390) 
We reviewed the above-referenced report which examines the diHerences  h  tie 
refibwsement  methodolo~es  used  by the Medicare  and Me&ctid  progr~s  to pay  for 
nebulizer  drugs.  Attached  are our comments  on the report  recommen&tion. 
Thank  you  for the  opportun.@  to review  and comment  on this  draft  repoti. 
Attachment 
10 
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c. 
..	.. ,,  .-r DMERCsbeen  able  toadopt  thesame  drug  pricing  methods  as their  17 State 
Medicaid  agency  counterparts,  and  (2) a manufacturers  rebate  program  been  in effect 
for Medicare. 
As shown  in this report,  however,  although  Medicaids  pricing  methods  resulted  in a 
net  savings of over  $11.7 million,  there  were  instances  where  Medicares  current 
method  of pricing  resulted  in a lower  price.  This had  the  effect  of lowering  the 
potential  savings to Medicare.  Because  of this we recommended  that  HCFA  allow 
DMERCS  the  option  of using Medicaids  method  of discounting  the  AWP  or 
Medicares  method  of using the  median  of the  national  AWP  for all generic  sources, 
whichever  results  in the  lower  cost to Medicare  and  its beneficiaries. 
Had  the  DMERCS  been  allowed  this option,  they  could  have  saved  the  Medicare 
program  and  its beneficiaries  $12,136,321  on the  price  paid  to drug  suppliers.  The 
increase  is due  to the  fact  that  whenever  the  Medicaid  price  per  ml was higher  then 
Medicares  price,  we used  Medicares  price.  This had  the  effect  of increasing  the  cost 
savings available  to Medicare  by $429,375.  Adding  the  cost  savings attributed  to the 
manufacturers  rebate  program,  the  total  potential  cost savings is $37,437,270. 
A-3
 APPENDIX  B 
B-1  Page 2

carriers.  Because inherent r~onableness  is the only tool we have, HCFA has already started

doing the pricing studies necessary to determine iflowering  prices of nebulizers is appropriate.

AcquisitionCost

This  optioninvolvesloweringdrugpayments by basing them on the estimated acquisition cost.  A

1994 survey attempt wss made by EICFAto COlkt  the necessary data to My  implement current

regulations.  The SUIVey approved by the office of Management and Budget.  The sumey

wss  not 
was found to be too burdensome to pursue because of the large number of physicians and drugs

that would be included.  We are currently examining a way to reduce or eliminate the survey

burden by using a percentage  of the AWP similar to that used by Medicaid.