DepartmelTitof Health  and Human  Services 
OFFICE  OF 
INSPECTOR  GENERAL 
EXCESSIVE  MEDICARE  PAYMENTS 

FOR  PRESCRIPTION  DRUGS 

JUNE GIBBS BROWN 
Inspector  General 
DECEMBER  1997 
OEI-03~97-00290  OFFICE OF INSPECIOR 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 Evaluationand 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. 

OEIs  Philadelphia  Regional  Office  prepared  this  report  under  the  direction  of 

Robert  A.  Vito,  Regional  Inspector  General.  Principal  OEI  staff  included: 

REGION  HEADQUARTERS 

Linda  M.  Ragone,  Project Leader  Lisa  A.  Foley,  Program  Specialist 

David  Tawes 

Nancy  J. Molyneaux 

Lauren  McNulty 

Amy  Sernyak 

Cynthia  R.  Hansford 

Brijen  Shaw 

To obtain copies of thisreport, please call the PhiladelphiaRegional Office at (800) 531-9562.  EXECUTIVE  SUMMARY 
PURPOSE 
To  compare  Medicare  allowances  for  prescription  drugs  with  drug  acquisition  prices 
currently  available  to  the  physician  and  supplier  communities. 
BACKGROUND 
Medicare  allowances  for  prescription  drugs  increased  25 percent  from  $1.8  billion  in 
1995  to  $2.3  billion  in  1996.  However,  the  number  of  services  allowed  increased  only 
9 percent  between  the  2 years. 
Medicare  does  not  pay  for  over-the-counter  or  many  prescription  drugs  that  are  self-
administered.  However,  the  program  does  pay  for  certain  categories  of  drugs  used  by 
Medicare  beneficiaries. 
On  January  1, 1998,  Medicare  Part  B will  begin  to  reimburse  covered  drugs  at  95 
percent  of  the  average  wholesale  price.  Currently,  Medicare  carriers  may  determine 
the  amounts  that  Medicare  will  pay  for  these  drugs  based  on  either  the  lower  of  the 
Estimated  Acquisition  Cost  (EAC)  or  the  national  Average  Wholesale  Price  (AWP). 
The  EAC  is determined  based  on  surveys  of  the  actual  invoice  prices  paid  for  the 
drug.  The  AWP  is reported  in  The  Red Book  and  other  pricing  publications  and 
databases  used  by  the  pharmaceutical  industry.  Historically,  it has  been  the  AWP  that 
carriers  have  used  to  develop  Medicare  reimbursement  for  prescription  drugs. 
To  determine  if average  wholesale  prices  paid  by  Medicare  truly  represent  wholesale 
prices  available  to  physicians  and  prescription  drug  suppliers,  we  focused  on  22 drug 
codes  representing  the  largest  dollar  outlays  to  the  program  in  1995.  We  then 
compared  the  Medicare  allowances  for  these  drug  codes  with  prices  available  to  the 
physician  and  supplier  communities. 
FINDINGS 
Medicare  allowances for 22 drugs exceeded actual wholesale prices by $447 million in 
1996. 
Medicare  and  its beneficiaries  payments  for  the  22 drugs  would  have  been  reduced  by 
an  estimated  29 percent  ($447  million  of  $1.5  billion)  if actual  wholesale  prices  rather 
than  AWPs  were  the  basis  for  Medicare  reimbursement.  Similar  savings  of  $445 
million  were  also  identified  for  1995.  If the  savings  percentage  for  just  the  22  drugs 
was  applied  to  Medicares  allowances  for  all  drugs,  the  program  and  its beneficiaries 
would  have  saved  an  estimated  $667  million  in  1996.  For more than one-third of the 22 drags review&  Medicare  allowed  amoan& were more 
than double  the actual  wholesale prices avaikkble to physicks  and suppliem. 
Medicare  allowed  between  2 and  10 times  the  actual  average  wholesale  prices  offered 

by  drug  wholesalers  and  group  purchasing  organizations  for  8 of  the  22  drugs 

reviewed.  Medicare  allowed  at  least  20 percent  more  than  the  actual  average 

wholesale  price  for  over  80 percent  of  the  22 drugs.  For  every  one  of  the  22 drugs 

reviewed,  Medicare  allowed  amounts  were  more  than  the  actual  average  wholesale 

price  in both  1995  and  1996.  Not  only  did  Medicare  pay  more  than  the  actual  average 

wholesale  price,  the  program  allowed  more  than  the  highest  average  wholesale  price 

for  every  drug. 

There is no consistency among carriers in establishing and updating Medicare  drug 
reimbursement  amounts. 
Although  Medicares  reimbursement  methodology  for  prescription  drugs  does  not 
provide  for  different  payment  rates  based  on  geographical  factors,  the  allowed 
amounts  for  individual  drug  codes  varied  among  the  carriers.  Medicare  guidelines 
allow  carriers  to  update  prescription  drug  reimbursement  on  a quarterly  basis. 
However,  not  only  did  some  carriers  update  yearly  rather  than  quarterly  but  carrier 
allowed  amounts  for  the  same  drug  code  differed  within  a single  quarter. 
RECOMMENDATIONS 
The  findings  of  this  report  provide  evidence  that  Medicare  and  its beneficiaries  are 
making  excessive  payments  for  prescription  drugs.  The  published  AWPs  that  are 
currently  being  used  by  Medicare-contracted  carriers  to  determine  reimbursement 
bear  little  or  no  resemblance  to  actual  wholesale  prices  that  are  available  to  the 
physician  and  supplier  communities  that  bill  for  these  drugs. 
We  believe  the  information  in  this  report  provides  further  support  for  a previous 
recommendation  made  by  the  Office  of  Inspector  General.  We recommendedthat 
HCFA  reexamine its Medicare  drug  reimbursementmethodologies,with the goal of 
reducingpaymentsas appropriate.  Beginning  in  January  1998,  Medicare 
reimbursement  for  prescription  drugs  will  be  95 percent  of  average  wholesale  price. 
We  believe  that  the  5 percent  reduction  is not  a large  enough  decrease  and  that 
further  options  to  reduce  reimbursement  should  be  considered. 
We  also  believe  that  the  variance  of  Medicare  reimbursement  for  individual  drug 
codes  among  carriers  is inappropriate.  The  rate  at which  physicians  and  suppliers  are 
paid  for  drugs  should  not  depend  on  which  carrier  the  providers  bill.  We, therefore, 
recommendthat HCFA  require all carriersto reimbursea uniformallowed amount 
for each HCFA  Common Procedural Coding  System(HCPCS)  drug  code. The  HCFA 
could  choose  to  supply  all  carriers  with  a list  of  average  wholesale  prices  that  it has 
determined  represent  each  drug  code.  The  carriers  could  then  use  the  uniform  prices 
to  calculate  payment.  The  HCFA  could  also  designate  one  single  entity  to  perform  all 
ii  necessary  calculations  to  determine  reimbursement  for  each  drug  code  on  a quarterly 
basis.  All  carriers  would  then  use  this  standard  reimbursement  amount. 
AGENCY  COMMENTS 
The  HCFA  concurred  with  our  recommendations.  The  HCFAs  proposal  in  the 
Presidents  1998  budget  that  would  have  required  physicians  to  bill  Medicare  the 
actual  acquisition  cost  for  drugs  was  not  adopted  by  Congress.  However,  the  agency 
states  that  it will  continue  to  pursue  this  policy  in  other  appropriate  ways. 
We  support  HCFAs  continued  pursuance  of  reducing  drug  payments  where 
appropriate.  We  do  not  believe  that  the  reimbursement  methodology  for  prescription 
drugs  recently  adopted  by  Congress  will  curtail  the  excessive  drug  payments  weve 
identified  in  the  Medicare  program.  In  this  report  weve  identified  Medicare 
allowances  that  were  11 to  900  percent  greater  than  drug  prices  available  to  the 
physician  and  supplier  communities. 
To  address  the  issue  of  uniformity  among  carriers,  HCFA  has  convened  a Workgroup 
to  develop  an  electronic  file  consisting  of  the  average  wholesale  prices  for  drugs 
covered  by  Medicare.  The  agency  reports  it will  distribute  this  file  to  Medicare 
contractors  for  their  use  in  paying  drug  claims. 
... 
111  TABLEOFCONTENTS 

PAGE 
EXEXWIWESUMMARY  ..........................................  i 
INTRODUCI-ION  .................................................  1 
FINDINGS  ......................................................  7 
 Estimated  savings  based  on  actual  wholesale  drug  prices  ..................  7 
 Medicare  allowed  amounts  more  than  double  the  average  actual  price  .......  8 
 Lack  of  consistency  in  reimbursement  rates  for  drug  codes  ................  9 
RECOMMENDATIONS  ...........................................  10 
APPENDICES 
A:  Description  of  22 HCPCS  Codes  .................................  A-l 
B:  Summary  of  Wholesale  Prices  and  Estimated  Savings  for  1995  and  1996  ....  B-l 
C:  Individual  Drug  Allowances  and  Savings  Percentages  for  1995  and  1996  ....  C-l 
D:  Health  Care  Financing  Administration  Comments  .....................  D-l  INTRODUCTION 
PURPOSE 
To  compare  Medicare  allowances  for  prescription  drugs  with  drug  acquisition  prices 
currently  available  to  the  physician  and  supplier  communities. 
BACKGROUND 
Medicare  allowances  for  prescription  drugs  increased  25 percent  from  $1.8  billion  in 
1995  to  $2.3  billion  in  1996.  However,  the  number  of  services  allowed  increased  only 
9 percent  between  the  two  years. 
Medicare  Coverage and Payment for Presctiptim  Drugs 
While  Medicare  does  not  pay  for  over-the-counter  or  many  prescription  drugs  that  are 
self-administered,  it does  pay  for  certain  categories  of  drugs  used  by  Medicare 
beneficiaries.  Under  certain  circumstances,  Medicare  Part  B covers  drugs  that  are 
used  with  durable  medical  equipment  or  infusion  equipment.  Medicare  will  cover 
certain  drugs  used  in  association  with  dialysis  or  organ  transplantation.  Drugs  used  for 
chemotherapy  and  pain  management  in  cancer  treatments  are  also  covered.  The 
program  also  covers  certain  types  of vaccines  such  as those  for  flu  and  hepatitis  B. 
Depending  on  the  type  of  drug,  both  local  carriers  and  four  Durable  Medical 
Equipment  Regional  Carriers  (DMERCs)  are  responsible  for  processing  claims  for 
drugs  covered  under  Part  B of  the  Medicare  program.  The  carriers  are  responsible 
for  determining  the  allowance  that  Medicare  will  pay  for  these  drugs. 
Carriers  base  their  current  allowance  rates  on  the  regulations  established  in  42  Code 
of  Federal  Regulation  405.517.  According  to  the  regulations,  Medicare  computes  an 
allowed  amount  for  drugs  based  on  either  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.  The  EAC  is determined 
based  on  surveys  of  the  actual  invoice  prices  paid  for  the  drug.  The  AWP  is 
determined  through  fie  Red Book  or  similar  pricing  publications  and  databases  used 
by  the  pharmaceutical  industry.  The  AWPs  are  mainly  provided  to  these  sources  by 
pharmaceutical  manufacturers.  If a drug  has  multiple  sources  (more  than  one  brand 
or  generic  version),  the  price  is based  on  the  lower  of  the  EAC  or  the  median  of  the 
national  AWP  for  all generic  sources.  Historically,  carriers  have  utilized  AWP  and  not 
estimated  acquisition  cost  to  develop  Medicare  reimbursement  for  prescription  drugs. 
Drugs  are  billed  to  the  Medicare  program  based  on  codes  developed  by  the  Health 
Care  Financing  Administration  (HCFA).  These  codes  are  developed  as part  of  the 
HCFA  Common  Procedure  Coding  System  (HCPCS).  The  codes  define  the  type  of 
drug  and,  in  most  cases,  a dosage  amount.  The  codes  do  not  indicate  whether  a brand 
1  or  generic  version  of  the  drug  was  administered;  nor  do  the  codes  provide  information 
on  the  manufacturer  or  distributor  of  the  drug  provided. 
Change in Medicare  Reimbmernent  for Prescrption  Drugs 
In  recent  legislation,  Congress  established  reimbursement  for  prescription  drugs  at  95 
percent  of  a drugs  average  wholesale  price.  This  change  will  be  implemented  on 
January  1, 1998. 
A  different  proposal  to  change  the  Medicare  reimbursement  methodology  for 
prescription  drugs  was  included  in  the  Presidents  FY  1998  budget.  The  proposal 
provided  for  the  amendment  of  42 U.S.C.  1395u(o)  to  set  payment  for  drugs  not 
otherwise  paid  on  a cost  or  prospective  payment  basis.  The  revision  set  payment  at 
the  lowest  of:  actual  acquisition  cost  to  the  provider,  AWP,  median  actual  acquisition 
cost,  or  an  amount  otherwise  determined  under  the  Code.  The  actual  acquisition  cost 
was  defined  to  include  all  discounts,  rebates,  or  any  other  benefit  in  cash  or  in  kind. 
This  proposal  was  supported  by  HCFA  but  was  not  the  version  eventually  adopted  by 
Congress. 
Related  Work by the cyg?ce of Inspector General 
This  report  is one  of  several  Office  of  Inspector  General  reports  concerning  Medicare 
payments  for  prescription  drugs.  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  payment 
mechanisms  for  17 drugs  and  found  that  Medicare  could  achieve  significant  savings  by 
adopting  reimbursement  strategies  similar  to  those  used  by  Medicaid.  The  OIG  has 
also  produced  several  reports  focusing  on  inhalation  drugs  paid  for  by  Medicare.  In 
Medicare  Payments for  Nebulizer Drugs  (OEI-03-94-00390),  we  found  that  Medicaid 
reimbursed  albuterol  sulfate  and  other  nebulizer  drugs  at  significantly  lower  prices 
than  Medicare.  In  a companion  report  called  A  Comparison  of Albuterol  Sulfate Prices 
(OEI-03-94-00392),  we  found  that  many  retail  and  mail-order  pharmacies  charge 
customers  less  for  generic  albuterol  sulfate  than  Medicares  allowed  price.  Suppliers 
Acquisition  Costs for Albuterol  Sulfate  (OEI-03-94-00393)  found  that  Medicares 
allowances  for  albuterol  sulfate  substantially  exceeded  suppliers  acquisition  costs. 
The  Office  of  Inspector  General  also  recently  issued  a report  on  acquisition  costs  of 
brand  name  drugs  by  Medicaid  pharmacies.  In Medicaid  Pharmacy  -Actual 
Acquisition  Costs of Presctiption Drug Products for Brand  Name  Drugs  (A-06-96-00030), 
the  Office  of  Audit  Services  estimated  that  the  actual  acquisition  cost  for  brand  name 
drugs  was  18 percent  below  AWP. 
METHODOLOGY 
To  determine  if average  wholesale  prices  paid  by  Medicare  truly  represent  wholesale 
prices  available  to  physicians  and  prescription  drug  suppliers,  we  focused  on  drug 
2  codes  representing  the  largest  dollar  outlays  to  the  program  in  1995.  We  then 
compared  the  Medicare  allowances  for  these  drug  codes  with  prices  available  to  the 
physician  and  supplier  communities. 
We  collected  from  three  sources  the  data  needed  to  compare  Medicare  allowed 
amounts  to  actual  wholesale  prices.  For  information  on  Medicare  allowances  for 
prescription  drugs,  we  compiled  statistics  from  HCFAs  National  Claims  History 
(NCH)  File.  We  then  collected  Medicare  reimbursement  rates  for  specific  drugs  from 
contracted  carriers.  Lastly,  we  analyzed  wholesale  prices  from  drug  wholesalers  and 
group  purchasing  organizations. 
Medicare Allowance  Data for prescription Drugs 
We  decided  to  review  the  30 drug  codes  with  the  highest  Medicare  allowances  for 
1995.  We  chose  1995  since  the  Medicare  claims  data  was  98 percent  complete  at  the 
commencement  of  the  inspection.  To  determine  the  Medicare  allowances  for 
prescription  drugs  in  1995,  we  compiled  a list  of  HCPCS  codes  that  represent  all  of 
the  drugs  which  Medicare  reimburses.  The  drug  code  list  primarily  contained  HCPCS 
codes  beginning  with  a J  (known  as J codes)  which  represent  mainly  injectable  drugs 
or  drugs  used  in  conjunction  with  durable  medical  equipment.  Also  included  in  our 
list  of  drugs  were  K  codes  which  usually  represent  immunosuppressive  drugs,  Q  codes 
which  represent  mainly  drugs  used  for  End  Stage  Renal  Disease,  several  A  codes  that 
represent  drugs  used  for  diagnostic  imaging,  and  immunization  or  vaccine  codes  that 
are  represented  by  a five  digit  numeric  code. 
We  then  retrieved  NCH  allowance  and  utilization  data  using  HCFAs  Part  B Extract 
and  Summary  System  (BESS).  We  aggregated  the  allowances  for  each  code  to 
calculate  Medicares  total  prescription  drug  allowance  for  1995.  We  then  determined 
the  30  drug  codes  with  the  highest  individual  allowances  for  that  year. 
Using  NCH  data,  we  calculated  the  Medicare  allowances  for  all  drugs  in  1996.  We 
also  determined  the  1996  allowances  for  the  30 drug  codes  with  the  highest  allowances 
in  1995.  At  the  time  of  our  inspection,  the  NCH  data  for  1996  was  95 percent 
complete. 
Carrier Allowances  for Prescription Drugs 
We  sent  requests  for  carrier  drug  reimbursement  rates  to  Medicares  26 fraud 
information  specialists.  The  fraud  information  specialists  coordinate  work  among  all 
HCFA  contractors  in  the  regions  they  represent.  There  are  a total  of  61 geographical 
regions  that  local  carriers  cover.  We  received  drug  allowances  from  50  of  the  61 
areas.  We  also  received  responses  from  two  of  the  four  DMERCS. 
We  requested  allowed  amounts  for  prescription  drug  codes  with  the  highest  total 
allowances  in  1995.  The  allowed  amount  reflects  the  dollar  reimbursement  that 
Medicare  will  allow  for  the  specific  dosage  defined  by  the  HCPCS  drug  code.  We 
3  asked  the  carriers  to  provide  allowed  amounts  by  quarter  for  calendar  years  1995, 
1996,  and  1997.  However,  some  carriers  provided  us  with  data  on  a yearly  basis  and 
others  only  for  certain  quarters. 
Some  carriers  also  furnished  allowed  amounts  for  both  participating  and  non-
participating  physicians.  Physicians  participating  in  the  Medicare  program  agree  to 
accept  Medicare  allowed  amounts  as total  reimbursement  for  their  services. 
Participating  physicians  receive  5 percent  more  in  Medicare  reimbursement  for 
services.  In  the  instances  where  both  participating  and  non-participating  allowed 
amounts  were  provided,  we  used  the  participating  physician  allowed  amounts.  More 
than  three-quarters  of  physicians  across  the  nation  now  participate  in  the  Medicare 
program. 
Utilizing  the  data  provided  by  carriers,  we  calculated  an  average  Medicare  allowed 
amount  for  each  drug  code  by year.  These  allowed  amounts  were  used  to  compare 
Medicare  reimbursement  with  drug  acquisition  costs  for  physicians  and  suppliers. 
Prescriplion Drug Costs for Physicians and Suppliers 
In  order  to  determine  acquisition  costs  for  the  top  drugs,  we  reviewed  1995  and  1996 
prices  offered  by wholesale  drug  companies  and  group  purchasing  organizations 
(GPOs).  We  obtained  pricing  lists/catalogs  for  seven  wholesale  drug  companies  and 
seven  group  purchasing  organizations.  Group  purchasing  organizations  provide 
members  with  lower  cost  products  by  negotiating  prices  for  specific  drugs  from 
manufacturers.  The  member  can  then  purchase  drugs  at  the  negotiated  price  either 
directly  from  the  manufacturer  or  a drug  wholesaler  that  agrees  to  accept  the 
negotiated  price.  For  the  GPOs  we  reviewed,  most  of  the  major  drug  wholesalers 
accept  the  GPO  contracted  price. 
The  14 pricing  sources  we  used  provided  pharmaceutical  products  mainly  to  physician 
practices  and  specialized  or  closed  pharmacies.  Depending  on  individual  State 
licensing  practices,  specialized  or  closed  pharmacies  normally  do  not  provide  retail 
prescription  drug  dispensing  to  walk-in  customers.  Instead,  they  often  provide 
prescription  drugs  for  home  infusion  or  inhalation  therapy. 
After  beginning  our  review  of wholesale  drug  costs,  we  determined  that  2 of  the  top 
30 drugs  codes  we  identified  for  1995  could  not  be  used  for  the  inspection.  Code 
57699  represents  not-otherwise-classified  inhalation  drugs  and  Code  57190  for  Factor 
VIII  (human  anti-hemophilic  factor)  has  a dosage  requirement  that  is difficult  to 
determine.  Therefore,  obtaining  wholesale  prices  for  these  two  codes  would  not  be 
possible. 
For  the  remaining  28  drug  codes  identified  for  our  analysis,  17 were  used  for  the 
treatment  of  cancer/leukemia,  5 were  inhalation  drugs,  2 were  vaccines,  and  2 were 
used  for  organ  transplantation  or  valve  replacement  complications.  There  was  also  a 
drug  used  for  immunodeficiencies  and  another  for  severe  infections.  The  majority  of 
4  these  drugs  would  most  likely  be  purchased  and  administered  by  physicians  or  other 

health  care  practitioners.  The  inhalation  drugs  or  drugs  used  for  home  infusion  would 

most  likely  be  provided  by  a specialized  pharmacy  or  supplier. 

For  the  28  drug  codes,  we  collected  1995  and  1996  prices  from  the  14 drug  pricing 

lists/catalogs.  We  decided  not  to  present  prices  for  drugs  where  fewer  than  two 

different  pricing  sources  could  be  identified  per  year.  There  were  6 codes  that  did  not 

meet  the  two  source  minimum.  These  codes  were:  vaccine  codes  90724  and  90732, 

inhalation  codes  57645  and  57660,  and  codes  K0121  and  51245  used  for 

transplants/valve  replacements.  A  list  of  the  HCPCS  codes  descriptions  and  dosages 

for  the  final  22  drugs  used  for  our  evaluation  is provided  in Appendix  A. 

The  22  drug  codes  represented  10 single-source,  9 multiple-source,  and  3 multiple-

brand  drugs.  A  single-source  drug  has  only  one  brand  of  drug  available.  A  multiple-

source  drug  has  both  brand  and  generic  forms  of  the  drug  available.  There  were  no 

drug  products  manufactured  in  the  dosage  defined  by  the  HCPCS  code  for  five  drugs 

(57620,  Q0136,  52405,  59181,  59293).  We  selected  all the  drugs  with  higher  dosages 

that  met  the  drug  description  and  applied  a conversion  factor  to  achieve  prices  for  the 

HCPCS-specified  dosage.  For  an  additional  code  (J1561),  we  found  that  out  of  the 

multitude  of  prices  we  could  find  for  the  drug  only  three  met  the  exact  dosage 

requirement.  Since  the  higher  dosage  products  seemed  to  be  the  more  prevalent  way 

of  purchasing  this  drug,  we  included  them  in  our  analysis. 

We  searched  the  14 price  lists  for  both  brand  and  generic  prices  during  1995  and 

1996.  For  nine  drug  codes,  we  obtained  between  5 and  8 separate  prices.  Eight  of 

the  nine  were  single-source  drugs.  For  another  eight  codes,  we  found  between  12 and 

29  separate  prices.  We  found  between  30 and  70 separate  prices  for  the  remaining 

five  drug  codes. 

Calculation  of Potential  Medicare  Savings for prescription Dogs 
To  determine  the  potential  savings  to  Medicare  if acquisition  costs  rather  than 
published  AWPs  were  used  for  reimbursement,  we  compared  Medicares  allowed 
amounts  to  the  wholesale  prices  we  collected.  To  do  this,  we  compiled  all the  pricing 
information  from  the  sources  reviewed  and  calculated  an  average  price  by year  for  all 
22 codes.  We  believe  that  the  pricing  information  supplied  by  the  drug  wholesalers 
and  group  purchasing  organizations  provides  factual  evidence  of  acquisition  costs 
available  to  physicians  and  suppliers. 
The  average  price  or  average  acquisition  cost  for  each  drug  code  was  then  compared 
to  the  average  Medicare  allowed  amount  that  we  calculated  from  the  carrier  data. 
For  each  drug  code,  the  difference  between  the  average  price  and  the  Medicare 
allowed  amount  was  computed.  We  then  applied  this  amount  to  the  number  of 
services  paid  by  Medicare  for  each  drug  in  1995  and  1996.  The  resulting  dollar 
amounts  were  aggregated  to  determine  the  total  estimated  savings  to  Medicare  if 
acquisition  costs  rather  than  AWP  had  been  used  to  determine  reimbursement. 
5  Appendix  B provides  the  average  Medicare  allowed  amounts  and  actual  average 
wholesale  prices  computed  for  the  22 drug  codes  reviewed.  Although  we  utilized  the 
actual  average  wholesale  price  to  report  savings  in  the  findings  section  of  this  report, 
the  appendices  also  contains  the  potential  savings  to  Medicare  if the  lowest  and 
highest  wholesale  prices  found  were  compared  to  the  Medicare  allowed  amount. 
6 
 FINDINGS 

MEDICARE  ALLOWANCES  FOR  22 DRUGS  EXCEEDED  ACTUAL 
WHOLESALE  PRICES BY $447MILLION  IN 1996. 
Medicare  carriers  now  base  prescription  drug  reimbursement  on  published  average 
wholesales  price  of  drugs.  However,  physicians  and  suppliers  are  often  able  to 
purchase  drugs  for  prices  that  are  much  lower  than  the  official  AWPs  provided  by 
manufacturers. 
After  reviewing  wholesale  drug  catalogs  and  group  purchasing  organizations  prices  for 
the  22  drugs,  we  estimated  that  $447  million  would  have  been  saved  by  Medicare  and 
its  beneficiaries  if Medicare  had  based  reimbursement  on  actual  wholesale  prices 
rather  than  published  AWPs  in  1996.  These  wholesale  prices  are  available  to 
physicians,  specialized  pharmacies,  and  other  suppliers.  These  wholesale  prices 
represent  the  actual  acquisition  costs  to  physicians  and  suppliers  that  bill  Medicare  for 
these  drugs. 
Total  allowed  charges  for  the  22  drugs  would  have  been  reduced  by  29 percent 
($447  million  of  $1.5  billion)  if actual  wholesale  prices  rather  than  AWP  were  the 
basis  for  Medicare  reimbursement.  The  22 drugs  represented  67 percent  of  the  $2.3 
billion  in  total  Medicare  drug  allowances  for  1996.  If the  savings  percentage  for  just 
the  22 drugs  was  applied  to  Medicares  reimbursement  for  all  drugs,  the  program  and 
its  beneficiaries  would  have  saved  an  estimated  $667  million  in  1996. 
The  savings  for  individual  drugs  ranged  from  13 percent  of  allowances  for  three  drugs 
(59202,  Q0136,  59185)  to  a high  of  92 percent  for  leucovorin  calcium  (50640).  Almost 
half  of  the  drugs  (10  of  22)  had  estimated  savings  greater  than  40  percent  of 
allowances.  A  table  provided  in Appendix  C lists  the  1996  allowances  and  estimated 
savings  for  the  22 drugs.  The  table  also  lists  the  percentage  of  allowance  saved  for 
each  individual  drug  if reimbursement  had  been  based  on  the  actual  average  wholesale 
prices  available  for  the  drug. 
Simiihr savings of $445 million were idenw  for 1995. 
If Medicare  had  based  reimbursement  on  actual  wholesale  costs  in  1995,  the  program 
and  its  beneficiaries  would  have  saved  an  estimated  35 percent  in  payments  for  the  22 
drugs.  This  would  have  amounted  to  savings  of  $445  million  on  $1.3  billion  in  total 
1995  program  expenditures  for  these  drugs.  The  $1.3  billion  in  expenditures  for  the 
22  drugs  represented  70 percent  of  the  $1.8  billion  in  Medicare  total  drug  allowances 
for  1995. 
The  percentage  of  allowance  saved  for  individual  drugs  ranged  from  15 percent  for 
carboplatin  (J9405)  and  fludarabine  phosphate  (59185)  to  95 percent  for  leucovorin 
calcium  (50640).  Half  of  the  drugs  (11  of  22)  had  estimated  savings  greater  than  40 
7  percent  of  their  1995  allowances.  Individual  drug  allowances  and  savings  for  1995  are 
presented  in  Appendix  C. 
FOR  MORE  THAN  ONE-THIRD  OF  THE  22 DRUGS  REVIEWED,  MEDICARE 
ALLOWED  AMOUNTS  WERE  MORE  THAN  DOUBLE  THE  ACTUAL 
AVERAGE  WHOLESALE  PRICE  AVAILABLE  TO  PHYSICIANS  AND 
SUPPLIERS. 
Medicare  allowed  between  2 and  10 times  the  actual  average  wholesale  prices  offered 
by  drug  wholesalers  and  group  purchasing  organizations  for  8 of  the  22  drugs 
reviewed.  For  one  drug,  Medicare  allowed  900  percent  more  than  the  average  price 
available  for  the  drug  in  1995  and  673  percent  more  in  1996.  The  chart  below 
provides  the  percentage  of  the  Medicare  allowed  amount  that  is greater  than  the 
actual  average  wholesale  price  for  each  of  the  eight  drugs. 
n4EiDIcARE~~MoRRTHANDOUB~ 
THE WHOLESALE PRICE POR EitGHT DRUGS 
1000 
9oc-
800-
J3370  NO10  J7672  J9000  J7670  J1561  JO640 J7620 
DRUG CODBS 
Medicare  allowances  were  also  significantly  higher  than  acquisition  costs  for  the 
remaining  14 drugs  reviewed.  Medicare  allowed  60 to  95 percent  more  than  the 
actual  average  wholesale  price  for  3 drugs  in  1995  and  2 drugs  in  1996.  Medicare 
allowed  amounts  were  higher  by  20 to  50 percent  for  9 drugs  in  1995  and  8 drugs  in 
1996.  Reimbursement  was  between  11 and  18 percent  more  for  the  remaining  2 drugs 
in  1995  and  4 drugs  in  1996. 
8 
 Medicare  and  its beneficiaries  paid  at  least  20 percent  more  than  the  actual  average 
wholesale  price  for  over  80 percent  of  the  22 drugs.  For  every  one  of  the  22  drugs 
reviewed,  Medicare  allowed  more  than  the  average  actual  price  in  both  1995  and 
1996.  Not  only  did  Medicare  pay  more  than  the  average  price,  the  program  allowed 
more  than  even  the  highest  wholesale  price  obtained  for  every  drug.  Appendix  B 
provides  information  on  the  highest  and  lowest  wholesale  price  available  for  each  drug 
in  1995  and  1996. 
Based  on  the  differences  found  between  Medicare  allowed  amounts  and  actual 
wholesale  prices,  it is apparent  that  the  current  Medicare  reimbursement  methodology 
is based  on  an  significantly  inflated  AWP  statistic  which  bears  little  resemblance  to 
actual  wholesale  prices  available  in  the  marketplace. 
THERE  IS NO  CONSISTENCY  AMONG  CARRIERS  IN ESTABLISHING  AND 
UPDATING  MEDICARE  DRUG  REIMBURSEMENT  AMOUNTS. 
Although  Medicares  reimbursement  methodology  for  prescription  drugs  does  not 
provide  for  different  payment  rates  based  on  geographical  factors,  the  allowed 
amounts  for  individual  drug  codes  varied  among  the  carriers.  Medicare  guidelines 
allow  carriers  to  update  prescription  drug  reimbursement  on  a quarterly  basis. 
However,  not  only  did  some  carriers  update  yearly  rather  than  quarterly  but  carrier 
allowed  amounts  for  the  same  drug  code  differed  within  a single  quarter. 
For  some  drug  codes,  the  differences  in  allowed  amounts  were  significant.  Carriers 
allowed  amounts  varied  even  for  single-source  drugs  where  the  reimbursement  rate  is 
based  on  only  one  AWP.  A  carrier  reimbursed  code  59217  (leuprolide  acetate,  a 
single-source  drug)  at  $496.25  for  all  of  1995.  Another  carrier  allowed  $412.29  for  the 
first  quarter  of  1995,  $439.30  for  the  second  and  third  quarters,  and  $477.50  for  the 
fourth.  For  the  first  quarter  of  1995,  providers  in  one  State  were  receiving  20 percent 
more  in  reimbursement  than  providers  billing  the  same  drug  code  in  another  State. 
The  second  carrier  eventually  paid  $496.26  for  this  code  in  the  first  quarter  of  1996. 
However,  the  first  carrier  increased  reimbursement  to  $515.63  in  the  same  quarter. 
Little  uniformity  was  found  among  carriers  when  comparing  changes  in  reimbursement 
from  the  first  quarter  of  1995  to  the  second  quarter  of  1997.  One  carriers 
reimbursement  for  code  59000  (doxorubicin  hcl,  10 mg.)  increased  128 percent  from 
$20  to  $45.50.  Another  carriers  rate  for  the  same  code  decreased  19 percent  from 
$48.20  to  $39.10. 
Since  Medicare  does  not  allow  geographical  differences  to  effect  drug  reimbursement, 
variations  would  seem  to  be  caused  by  carriers  decisions  regarding  when  to  update 
reimbursement,  what  sources  to  use  for  documenting  AWPs,  and  in  the  case  of 
multiple-source  drugs  which  generic  drugs  to  include  in  calculating  the  median  statistic. 
9 
 RECOMMENDATIONS 
The  findings  of  this  report  provide  evidence  that  Medicare  and  its  beneficiaries  are 
making  excessive  payments  for  prescription  drugs.  The  published  AWPs  that  are 
currently  being  used  by  Medicare-contracted  carriers  to  determine  reimbursement 
bear  little  or  no  resemblance  to  actual  wholesale  prices  that  are  available  to  the 
physicians  and  suppliers  that  bill  for  these  drugs.  By basing  reimbursement  on 
published  AWPs  rather  than  more  appropriate  acquisition  or  wholesale  prices,  we 
estimate  that  Medicare  and  its beneficiaries  paid  nearly  one  billion  dollars  more  for  22 
drugs  in  1995  and  1996. 
We  believe  the  information  in  this  report  provides  further  support  for  a previous 
recommendation  made  by  the  Office  of  Inspector  General.  We recommendedthat 
HCFA  reexamine its Medicare drug reimbursementmethodologies,with the goal of 
reducingpaymentsas appropriate. The  HCFA  concurred  with  the  recommendation. 
We  urge  readers  to  review  our  prior  report,  Medicare  Payments for  Nebulizer Drugs, 
which  provided  the  full  text  of  HCFAs  comments  on  our  recommendation. 
For  our  readers  convenience,  the  options  for  changing  Medicares  reimbursement 
methodology  that  appeared  in  the  recommendation  are  presented  below.  We  have 
modified  the  original  discounted  AWP  and  acquisition  cost  options  in  response  to  the 
evidence  presented  in  this  report  concerning  the  large  disparity  between  published 
AWPs  and  actual  average  wholesale  prices  available  for  prescription  drugs. 
Options for  Changing Medicares Reimbuwment  Methodology for l%.wiption  Drugs 
Discounted  Wholesale  Price 
Beginning  in  January  1998,  Medicare  will  reimburse  prescription  drugs  at  95 percent 
of  AWP.  Many  State  Medicaid  agencies  use  greater  discounted  AWPs  to  establish 
drug  prices.  Medicare  could  also  base  its  drug  payments  on  this  larger  discounted 
average  wholesale  prices.  We  believe  that  the  5 percent  discount  that  will  soon  be 
implemented  is not  a large  enough  decrease.  Upon  implementation  of  this  option, 
some  type  of  general  limit  should  be  applied  to  the  prices  to  ensure  that  inappropriate 
increases  in  average  wholesale  prices  that  could  occur  in  subsequent  years  do  not 
adversely  affect  Medicare  payments.  In  addition,  the  Secretary  should  be  granted  the 
authority  to  conduct  sample  surveys  of  actual  wholesale  prices  to  determine  the 
amount  of  difference  between  actual  average  wholesale  prices  and  published  AWPs. 
The  percentage  difference  found  in  the  sample  could  then  be  applied  to  all AWPs 
used  by  the  program  to  determine  drug  reimbursement. 
Acquisition  Cost 
Medicare  could  base  the  payment  of  drugs  on  either  actual  or  estimated  acquisition 
costs.  Although  Medicare  currently  has  the  authority  to  use  EAC,  carriers  have  yet  to 
10  successfully  implement  the  option.  Upon  implementation  of  either  the  actual  or 

estimated  method,  we  believe  that  some  type  of  general  limit  should  be  applied  to 

ensure  that  inappropriate  increases  in  drug  prices  do  not  occur  in  subsequent  years. 

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. 

To  implement  this  option,  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  National  Drug  Codes  (NDC)  in 

processing  drug  claims.  The  NDC  identifies  the  manufacturer  and  reflects  whether  the 

drug  is a brand  name  or  a generic  equivalent. 

Competitive  Bidding 

Medicare  could  develop  a legislative  proposal  to  allow  it to  take  advantage  of  its 

market  position.  While  competitive  bidding  is not  appropriate  for  every  aspect  of  the 

Medicare  program  or  in  every  geographic  location,  we  believe  that  it can  be  effective 

in  many  instances,  including  the  procurement  of  drugs.  Medicare  could  ask 

pharmacies  to  compete  for  business  to  provide  Medicare  beneficiaries  with 

prescription  drugs.  All  types  of  pharmacies  could  compete  for  Medicare  business, 

including  independents,  chains,  and  mail-order  pharmacies. 

Inherent  Reasonableness 

Since  Medicares  guidelines  for  calculating  reasonable  charges  for  drugs  result  in 

excessive  allowances,  the  Secretary  can  use  her  inherent  reasonableness  authority  to 

set  special  reasonable  charge  limits.  If this  option  is selected,  however,  it will  not  be 

effective  unless  the  Secretarys  authority  to  reduce  inherently  unreasonable  payment 

levels  is streamlined.  The  current  inherent  reasonableness  process  is resource 

intensive  and  time  consuming,  often  taking  two  to  four  years  to  implement.  Medicare 

faces  substantial  losses  in  potential  savings--certainly  in  the  millions  of  dollars--if 

reduced  drug  prices  cannot  be  placed  into  effect  quickly. 

11 
 We also  believe  that  the  variance  of  Medicare  reimbursement  for  individual  drug 
codes  among  carriers  is inappropriate.  The  rate  at  which  physicians  and  suppliers  are 
paid  for  drugs  should  not  depend  on  which  carrier  providers  bill.  We, therefore, 
recommendthatHCFA  require all carriersto reimbursea uniformallowed amount 
for each HCPCS  drug code. The  HCFA  could  choose  to  supply  all  carriers  with  a list 
of  average  wholesale  prices  that  it has  determined  represent  each  drug  code.  The 
carriers  could  then  use  the  uniform  prices  to  calculate  payment.  The  HCFA  could 
also  designate  one  single  entity  to  perform  all necessary  calculations  to  determine 
reimbursement  for  each  drug  code  on  a quarterly  basis.  All  carriers  would  then  use 
this  standard  reimbursement  amount. 
AGENCY  COMMENTS 
The  HCFA  concurred  with  our  recommendations.  The  HCFAs  proposal  in  the 
Presidents  1998  budget  that  would  have  required  physicians  to  bill  Medicare  the 
actual  acquisition  cost  for  drugs  was  not  adopted  by  Congress.  However,  the  agency 
states  that  it will  continue  to  pursue  this  policy  in  other  appropriate  ways.  The  full 
text  of  HCFAs  comments  are  provided  in Appendix  D. 
We  support  HCFAs  continued  pursuance  of  reducing  drug  payments  where 
appropriate.  We do  not  believe  that  the  reimbursement  methodology  for  prescription 
drugs  recently  adopted  by  Congress  will  curtail  the  excessive  drug  payments  weve 
identified  in  the  Medicare  program.  In  this  report  weve  identified  Medicare 
allowances  that  were  11 to  900  percent  greater  than  drug  prices  available  to  the 
physician  and  supplier  communities. 
To  address  the  issue  of  uniformity  among  carriers,  HCFA  has  convened  a Workgroup 
to  develop  an  electronic  file  consisting  of  the  average  wholesale  prices  for  drugs 
covered  by  Medicare.  The  agency  reports  it will  distribute  this  file  to  Medicare 
contractors  for  their  use  in paying  drug  claims. 
12 
 APPENDIX  A 

Descriptionof 22 HCPCS Codes 
Code  Description 

59217  Leuprolide  Acetate  (for  depot  suspension),  7.5 mg. 

57620  Albuterol  Sulfate,  0.083%,  per  ml.,  inhalation  solution  administered 

through  DME 

59265  Paclitaxel,  30 mg. 

59202  Goserelin  Acetate  Implant,  per  3.6 mg. 

JO640  Injection,  Leucovorin  Calcium,  per  50 mg. 

59045  Carboplatin,  50 mg. 

51440  Injection,  Filgrastim  (G-CSF),  per  300  mcg. 

Q0136  Injection,  Epoetin  Alpha,  (For  Non-ESRD  Use),  per  1000  units 

52405  Injection,  Ondansetron  Hydrochloride,  per  1 mg. 

51625  Injection,  Granisetron  Hydrochloride,  per  1 mg. 

51561  Injection,  Immune  Globulin,  Intravenous,  per  500  mg. 

57670  Metaproterenol  Sulfate,  0.4%,  per  2.5 ml.,  inhalation  solution 

administered  through  DME 

51441  Injection,  Filgrastim  (G-CSF),  per  480  mcg. 

59182  Etoposide,  100 mg. 

59000  Doxorubicin  HCL,  10 mg. 

5903 1  BCG  (Intravesical)  per  instillation 

59181  Etoposide,  10 mg. 

57672  Metaproterenol  Sulfate,  0.6%,  per  2.5 ml.,  inhalation  solution 

administered  through  DME 

59293  Injection,  Mitoxantrone  Hydrochloride,  per  5 mg. 

59185  Fludarabine  Phosphate,  50 mg. 

59010  Doxorubicin  HCL,  50 mg.  (code  discontinued  12/31/96) 

53370  Injection,  Vancomycin  HCL,  up  to  500  mg.  (code  discontinued  for 

infusion  9/l/96) 

A-l  APPENDIX  B 

SUMMARY  OF WHOLESALE  PRICES AND  F2XlMATED  SAVINGS 

FOR  1995AND  1996 

B-l  SUMMARY  OF WHOLESALE  PRICES AND  FISTMATED  SAVINGS  FOR  1995 

B-2 
 SUMMARY  OF WHOLFISALE  PRICES AND  ESTIMATED  SAVINGS  FOR  1996 

HCPCS  Awnage  SavingsBased  Lowest  savings 
Code  Medicare  AYerage  onActual  wholi2sate  loll 
Wholesale  Avemgt~  Pliee  f,4owest 
AtXl0Ullt  Price  Wholesale  Found  whwe 
Price  Price 
J9217  $499.72  $414.73  $104,365,435  $409.27 $111,066,902  $421.00  $96,663,201 

57620 
 $0.41  $0.19  $92,199,355  $0.16  $105,604,026  $0.25  $67,530,255 

J9265 
 $181.32  $148.56  $22,757,465  $140.26  $28,526,148  $155.43  $17,986,896 

JV202  $378.29  $329.43  $11,215,983  $317.00  $14,067,894  $341.85  $8,364,073 

11  J&4@  1 
 $21.701  $2.811  $52,514,0211  $2.391  $53,670,25/3  $3.451  $50,724,087 

Jw45  $82.76  $67.64  $12,539,724  $64.90  $14,814,584 
 $70.55  $10,128,000 

fl440 
 $154.65  $123.39  $11,592,740  $121.56  $12,271,393 
 $126.00  $10,624,824 

00136 
 $11.93  $10.37  $10,399,198  $9.31  $17,440,772 
 $10.70  $8,195,663 

52405  $6.08  $4.28  $14,319,348  $3.92  $17,172,050 
 $4.73  $10,776,959 

J1625  $170.02  $125.71  $13,399,842  $122.90  $14,250,690 
 $128.00  $12,708,277 

J1561  $42.21  $16.65  $24,808,622  $12.50  $28,833,317 
 $34.00  $7,967,739 

57672 
 $1.23  $0.44  $4,805,175  $0.32  $5,492,908 
 $0.55  $4,117,563 

J9293  $172.81  $142.40  $5712,650  $139.91  $2,935,141 
 $145.38  $2,447,586 

59185 
 $179.45  $156.50  $2,049,320  $152.00  $2,451,148 
 $161.00  $1,647,493 

J9m.3 
 $207.12  $65.46  $10,513,722  $54.00  $11,364,260 
 $76.00  $9,731,464 

J3370  $9.44 $4.42  $43213,709 $3.45 $5,027,227
 $6.45  $2,509,417

L-.- I  I  I  I  I  I  I 
TOTAL,  $447,24i$32  $514,085$563 
 $357,776,756 
B-3 
 APPENDIX  C 

INDIVIDUAL  DRUG  ALLOWANCES  AND  SAVINGS  PERCENTAGES 

FOR  1995AND  1996 

C-l  EstimatedMedicare Savingsif AcquisitionCosts 
Were Used for 1995PrescriptionDrug Reimbursement 
c-2  EstimatedMedicare Savingsif AcquisitionCosts 
Were Used for 1996PrescriptionDrug Reimbursement 
c-3  APPENDIX  D 

HEALTH  CARE  FINANCING  ADMINISTRATION  COMMENTS 

D-l  DEPARTMENT  OF HEALTH  dr HUMAN SERVICES  Health Care Financing Administration 
Deputy Administrator 
Washington. D.C. 20201 
OCT - I 1997 
DATE: 
TO: 	 June Gibbs Brown 
Inspector General 
FROM: 	 Nancy-Aun  Min DeParle  N  M\T 
Deputy Administrator 
SUBJECT: 	 Office of Inspector  General (OIG) Draft Report: Excessive  Medicare 
Payments  for Prescription  Drugs, (OEI-03-97-00290) 
We reviewed  the above-referenced  report that examines Medicare payments  for 
prescription  drugs.  Medicare  allowances for prescription  drugs increased 25 percent from 
$1.8 bilhon  in 1995 to $2.3 billion in 1996.  However, the number of services allowed 
increased  only 9 percent between the 2 years. 
Medicare  does not pay for over-the-counter  drugs or many prescription  drugs that are 
self-administered.  However, the programwill  pay for certain categories of drugs used by 
its beneficiaries.  Contracted  carriers determine the amounts that Medicare wi.lIpay for the 
drugs based on the lower of the estimated acquisition cost @AC) or the national average 
wholesale  price (AWP).  The allowed amount is the price that Medicare  and its 
~en&%iaries pay a drug supplier.  OIG fi.udings indicate that at present, it is the AWP 
that carriers use to develop Medicare  reimbursement  for prescription  drugs.  The AWP is 
reported in The Red Book and other pricing publications  and databases used by the 
pharmaceutical  industry.  The EAC is determined based orrsurveys  of the actual invoice 
prices paid for the drug. 
The findings  contained iu the report indicate that Medicare is making excessive payments 
for prescription  drugs.  The published  AWPs currently used by Medicare carriers to 
determine reimbursement  do not resemble the actual wholesale prices which are available 
to the physician  and supplier communities  that bill for these drugs. 
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OIG suggests that the Health Care Financing Administration  (HCFA): (1) reexamine  its 
Medicare  drug reimbursement  methodologies,  with the goal of reducing payments;  and 
(2) require  all carriers to reimburse  a uniform allowed amount for each HCFA Common 
Procedural  Coding System (HCPCS) drug code. 
HCFA concurs with OIGs recommendations.  Our detailed comments are as follows: 
OIG Recommendation  1 
HCFA should require  all carriers to reimburse  a uniform  allowed amount for each 
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HCPCS drug code. 
HCFA Response 
We concur.  HCFA agrees with OIGs findings and recommendations  contained in this 
report.  HCFA convened  a Workgroup to develop an electronic  file consisting of the 
AWPs for drugs covered by Medicare.  HCFA will then distribute this file to Medicare 
contractors  for their use in paying  claims for drugs. 
OIG Recommendation  2 
HCFA should reexamine  its Medicare  drug reimbursement  methodologies,  with the goal 
of reducing  payments  as appropriate. 
We concur.  We agree with OIGs fmdings  and recommendations.  We included a 
provision  in the Presidents  1998 budget bill that would have eliminated the markup for 
drugs billed to Medicare  by requiring  physicians  to bill the program the actual acquisition 
cost for drugs.  Unfortunately,  this provision  was not enacted, but we will pursue this 
policy  in other appropriate  ways. 
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