Department of Health and Human Services 

OFFICE OF 

INSPECTOR GENERAL 

Inspector General 

February 2004 

OEI-03-02-00700 

MEDICARE PAYMENTS FOR 

ENTERAL NUTRITION 
Office of Inspector General

http://oig.hhs.gov 

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 the following operating components: 

Office of Audit Services 

The OIG's 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 Evaluation and Inspections 

The OIG's 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 the inspections reports generate rapid, accurate, and up-to-date information on the 

efficiency, vulnerability, and effectiveness of departmental programs. 

Office of Investigations 

The OIG's Office of Investigations (OI) 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 OI lead to criminal 

convictions, administrative sanctions, or civil monetary penalties. The OI also oversees 

state Medicaid fraud control units, which investigate and prosecute fraud and patient 

abuse in the Medicaid program. 

Office of Counsel to the Inspector General 

The Office of Counsel to the Inspector General (OCIG) provides general legal services to 

OIG, rendering advice and opinions on HHS programs and operations and providing all 

legal support in OIG's internal operations. The OCIG imposes program exclusions and 

civil monetary penalties on health care providers and litigates those actions within the 

department. The OCIG also represents OIG in the global settlement of cases arising 

under the Civil False Claims Act, develops and monitors corporate integrity agreements, 

develops model compliance plans, renders advisory opinions on OIG sanctions to the 

health care community, and issues fraud alerts and other industry guidance. 
� ABSTRACT

Category I enteral nutrition formulas represented $201 million of the 

$311 million in Medicare Part B payments for all enteral nutrition 

formulas in 2001. The Office of Inspector General (OIG) compared the 

amount Medicare reimburses for Category I enteral nutrition formulas 

(procedure code B4150) to prices available to the supplier community. 

We obtained 177 individual contract prices for Category I formulas 

through 1 national wholesaler, 1 group purchasing organization, and 1 

supplier who negotiated contracts directly with 2 enteral nutrition 

formula manufacturers. We found that Medicare’s reimbursement 

amount for Category I formulas ($0.61 in 2001) exceeded median 

contract prices available to suppliers from the 3 sources reviewed by 70 

to 115 percent. Median contract prices ranged from $0.28 per unit to 

$0.36 per unit. Individual contract prices for Category I formulas varied 

from a low of $0.18 per unit to a high of $0.86 per unit, yet the majority 

(75 percent) of individual contract prices were lower than $0.42 per unit. 

OIG recommended that the Centers for Medicare & Medicaid Services 

(CMS) consider using its inherent reasonableness authority to reduce 

the Medicare reimbursement amount for Category I formulas. CMS 

agreed with our recommendation. 

OEI - 03 - 02 - 00700 MEDICARE P AYMENTS FOR E NTERAL NUTRITION i 
� EXECUTIVE SUMMARY

OBJECTIVE 

This inspection compared the amount Medicare reimburses for Category 

I enteral nutrition formulas (procedure code B4150) to prices available 

to the supplier community. 

BACKGROUND 

Medicare covers enteral nutrition therapy, commonly called tube 

feeding, for beneficiaries who cannot swallow due to a permanent 

medical problem or an impairment of long and indefinite duration. 

Medicare Part B coverage of enteral nutrition therapy is provided under 

the prosthetic device benefit for beneficiaries residing at home, or in a 

nursing facility when the stay is not covered by Medicare Part A. 

Medicare Part B payments for enteral nutrition formulas totaled more 

than $311 million in calendar year 2001. 

Medicare groups enteral nutrition formula products into seven codes, 

based on their composition. Category I formulas represented by code 

B4150 accounted for $201 million of the $311 million in Medicare Part B 

payments for all enteral nutrition formulas in 2001. Medicare 

reimbursement for Category I formulas was $0.61 per 100 calories of 

formula in 2001. 

While a wide variety of enteral nutrition formulas meets the criteria for 

inclusion in Category I, Medicare does not collect any information on 

the brands and types of formulas that are actually provided to Medicare 

beneficiaries when suppliers submit Category I formula claims for 

reimbursement. 

Suppliers may purchase enteral nutrition formulas from sources such as 

wholesalers, group purchasing organizations, and directly from 

manufacturers. Prices charged to individual suppliers are often based 

on the volume of product purchased. In order to compare Medicare’s 

reimbursement amount to prices available to suppliers, we obtained 

contract prices for Category I enteral nutrition formulas through one 

national wholesaler and through one group purchasing organization. 

We also obtained information on one supplier’s contract prices that were 

negotiated directly with two enteral nutrition formula manufacturers. 

We did not collect data from suppliers regarding any additional supplier 

costs related to furnishing enteral nutrition formula to Medicare 

OEI - 03 - 02 - 00700 MEDICARE P AYMENTS FOR E NTERAL NUTRITION ii 
EXECUTIVE SUMMARY 

beneficiaries. Therefore, the median contract prices do not include 

these associated supplier costs. 

To determine how much Medicare and its beneficiaries could save if the 

reimbursement amount for Category I formulas were set at prices 

available to suppliers, we calculated percentage differences between the 

medians of contract prices for Category I formulas and the Medicare 

reimbursement amount in 2001. We applied these percentage 

differences to 2001 Medicare Part B payments for Category I formulas 

in order to compute potential program savings. 

Since completion of our evaluation, the Medicare Prescription Drug, 

Improvement, and Modernization Act of 2003 (the Act) was signed into 

law. In part, the Act directs the Secretary of the Department of Health 

and Human Services to establish a program for competitive acquisition 

of durable medical equipment and supplies. This program has yet to be 

developed and implemented; however, it could reform how Medicare 

reimburses for enteral nutrition, equipment and supplies. 

FINDINGS 

Medicare’s reimbursement amount for Category I enteral nutrition 

formulas exceeded the median of purchase prices reviewed by as 

much as 115 percent. An analysis of 177 contract prices available to 

suppliers from the 3 sources reviewed indicated that the Medicare 

payment amount for Category I formulas exceeded median contract 

prices by 70 to 115 percent. The lowest median contract price for 

Category I formulas was obtained by the supplier who negotiated prices 

directly with manufacturers. If Medicare’s payment amount for these 

formulas had been set at the median of purchase prices reviewed, we 

estimate that the program and its beneficiaries could have saved over 

$82 million in calendar year 2001. 

Individual contract prices for Category I formulas varied widely, from a 

low of $0.18 per unit to a high of $0.86 per unit. The majority (75 

percent) of individual contract prices were lower than $0.42 per unit. At 

present, Medicare is unable to determine whether most beneficiaries are 

using the lower-priced or higher-priced products because the program 

does not collect any specific information on the products that are 

provided to beneficiaries when suppliers submit claims for Category I 

formulas. 

OEI - 03 - 02 - 00700 MEDICARE P AYMENTS FOR E NTERAL NUTRITION iii 
EXECUTIVE SUMMARY 

RECOMMENDATION 

The findings of this report suggest that the supplier community obtains 

Category I enteral nutrition formula products at prices that are lower 

than Medicare’s reimbursement amount. If Medicare’s reimbursement 

amount had been based more closely on these prices, the program and 

its beneficiaries could have realized savings. 

The Centers for Medicare & Medicaid Services (CMS) had attempted to 

reduce Medicare payments for enteral nutrition formulas through the 

use of its inherent reasonableness authority. However, Congress 

suspended the use of the inherent reasonableness authority in the 1999 

Medicare, Medicaid, and SCHIP Balanced Budget Refinement Act 

before payment reductions could be implemented. In December 2002, 

CMS published an interim final rule on the use of inherent 

reasonableness authority. This rule, which became effective in 

February 2003, allows CMS contractors to raise or lower Medicare 

payment amounts for medical equipment and supplies by 15 percent in 

any given year without a formal rulemaking process. 

We believe that continued CMS attention to Medicare Part B payments 

for Category I enteral nutrition formulas is warranted. Since CMS now 

has the authority to implement inherent reasonableness reductions, we 

recommend that CMS: 

Consider using its inherent reasonableness authority to reduce the 

Medicare reimbursement amount for Category I enteral nutrition formulas. 

CMS may want to begin an inherent reasonableness review by collecting 

information from Medicare suppliers to identify the specific Category I 

enteral nutrition formulas that suppliers provide to Medicare 

beneficiaries. CMS may also want to collect information from suppliers 

to determine suppliers’ purchase costs for the specific formulas used by 

Medicare beneficiaries. 

CMS agreed with our recommendation that they consider using 

inherent reasonableness authority to reduce the reimbursement amount 

for Category I formulas. CMS noted that it will not be able to initiate 

inherent reasonableness reviews until its contractor develops written 

procedures for conducting these reviews according to the statute and 

regulation. 

OEI - 03 - 02 - 00700 MEDICARE P AYMENTS FOR E NTERAL NUTRITION iv 
� TABLE OF CONTENTS

ABSTRACT ................................ ....................... i

EXECUTIVE SUMMARY ................................ ......... ii

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

FINDINGS ................................ ........................ 7

Medicare reimbursement for Category I formulas

exceeded median purchase price........................................................ 7

RECOMMENDATION ................................ ............ 10

APPENDICES ................................ .................... 11

A : Calculation of Potential Savings for

Category I Enteral Formulas ..................................................... 11

B: Centers for Medicare & Medicaid Services’ Comments ............. 12

ACKNOWLEDGMENTS ................................ .......... 14
� INTRODUCTION

OBJECTIVE 

This inspection compared the amount Medicare reimburses for Category 

I enteral nutrition formulas (procedure code B4150) to prices available 

to the supplier community. 

BACKGROUND 

Medicare Coverage of Enteral Nutrition Therapy 

Medicare covers enteral nutrition therapy, commonly called tube 

feeding, for beneficiaries who cannot swallow due to a permanent 

medical problem or an impairment of long and indefinite duration.1 

Medicare Part B coverage of enteral nutrition therapy is provided under 

the prosthetic device benefit for beneficiaries residing at home, or in a 

nursing facility when the stay is not covered by Medicare Part A. 

Enteral nutrition formulas are available in liquid or powder form (which 

is reconstituted with water). The liquid solution is administered 

through a tube, which is threaded through the patient’s nose or a 

surgical opening that leads directly to the stomach or intestine. Liquid 

enteral nutrition formulas are packaged in cans and pre-filled sterile 

containers. A canned formula is emptied into a plastic bag or container, 

which is then connected to tubing and hung from an IV pole for 

administration. Unlike cans, the pre-filled sterile systems do not 

require transfer of formula from one container to another. A pre-filled 

container is “spiked” with tubing and then hung from an IV pole for 

administration. 

Medicare groups enteral nutrition formula products into seven classes, 

based on their composition. Products falling within these classes are 

identified by one of seven Healthcare Common Procedure Codes 

(HCPCs) for reimbursement purposes. A wide variety of enteral 

nutrition formulas are grouped under Category I, including Boost®, 

Ensure®, Isosource®, and Nutren®. However, Medicare carriers do not 

collect any information on the manufacturer, brand name, type, and size 

of packaging of the individual enteral nutrition formulas that they cover 

under the Category I procedure code. 

1 Centers for Medicare & Medicaid Services, Medicare Coverage Issues Manual, 

Section 65-10. 

OEI - 03 - 02 - 00700 MEDICARE P AYMENTS FOR E NTERAL NUTRITION 1 
INTRODUCTION 

Medicare Part B Payments for Enteral Nutrition Formulas 

Medicare Part B payments for enteral nutrition formulas totaled more 

than $311 million in 2001. Category I enteral nutrition formulas 

represented by code B4150 (defined in Table 1) accounted for $201 

million, or almost two-thirds, of total formula allowances. Code B4150 

ranked ninth in a listing of durable medical equipment and supply codes 

with the highest Medicare allowances in the last quarter of 2001.2 

Table 1. Procedure Code B4150 

HCPC Code Description 2001 Medicare 

Allowances 

B4150 

Enteral formulae; Category I; semi-synthetic intact 

protein/protein isolates, administered through an 

enteral feeding tube, 100 calories = 1 unit 

$201,066,767 

Sources: American Medical Association, HCPCS 2002 publication; CMS’ National Claims History File 

Part B claims for enteral nutrition formulas are processed and paid by 

four durable medical equipment regional carriers (DMERCs). Medicare 

carriers use national fee schedule amounts to reimburse claims for 

enteral nutrition formulas. 

Medicare reimbursement for enteral nutrition formulas is based on the 

number of calories of formula provided to a patient, not the volume of 

the product. Reimbursement amounts are for one unit, defined as 100 

calories, of formula. For example, if a patient is prescribed 1,000 

calories of formula per day, Medicare reimbursement is based on 10 

units of formula per day. Medicare reimbursement for Category I 

formulas was $0.61 per unit in 2001. 

Efforts to Reduce Medicare Payments for Enteral Nutrition Formulas 

In 1998, DMERCs proposed a 16 percent reduction in Medicare’s 

allowance for Category I formulas using the Centers for Medicare & 

Medicaid Services’s (CMS’s) revised inherent reasonableness authority. 

This authority allowed DMERCs to adjust Medicare payments up or 

down by a maximum of 15 percent per year for medical equipment and 

supplies without going through a formal rulemaking process. An 

incremental approach would have resulted in a 15 percent reduction in 

the first year of implementation and an additional 1 percent reduction 

2 The SADMERC Abstract, Volume VIII, Palmetto GBA, June 14, 2002 (Internal CMS 

document). 

OEI - 03 - 02 - 00700 MEDICARE P AYMENTS FOR E NTERAL NUTRITION 2 
INTRODUCTION 

in the second year. The proposed reductions were based on DMERCs’ 

surveys of retail prices for items “that they suspected had excessive 

Medicare payment rates,”3 including Category I formulas. However, 

Congress suspended the use of the inherent reasonableness authority in 

the 1999 Medicare, Medicaid, and SCHIP Balanced Budget Refinement 

Act before payment reductions could be implemented. This provision 

required the U.S. General Accounting Office (GAO) to complete a study 

of the potential effects of using inherent reasonableness measures, and 

required CMS to issue a final rule that responded to the GAO report 

before CMS could use this authority to reduce Medicare payments. 

The GAO report (issued in July 2000) indicated that Medicare 

allowances for some items of durable medical equipment may be 

substantially higher than the prices available in retail outlets. 

However, GAO questioned the DMERCs’ retail survey results for 

enteral nutrition formulas, noting, “the DMERCs did not survey the 

types of enteral nutrition formulas and the packaging systems 

considered most appropriate and generally used for tube feeding.”4 

GAO concluded that retail survey data alone did not provide sufficient 

evidence to adjust the Medicare allowance amount for Category I 

formulas. CMS published an interim final rule on the use of inherent 

reasonableness authority in December 2002. This rule, which became 

effective in February 2003, limits payment adjustments to a 15 percent 

increase or decrease in any given year and also states that proposed 

payment adjustments of less than 15 percent do not provide "a sufficient 

basis" for the use of this inherent reasonableness authority. 

Enteral nutrition formulas and associated equipment and supplies were 

also included in the first round of a CMS competitive bidding 

demonstration in Polk County, Florida from October 1999 through 

September 2001. This project aimed to demonstrate how competition 

among suppliers could reduce Medicare payments for some medical 

equipment and supplies. Competitive bidding demonstration 

allowances for six of the seven enteral formula HCPCs were an average 

of 9.1 percent lower than fee schedule rates. The demonstration 

allowance for Category I formulas was $0.56 – an amount that is 8.2 

percent lower than the national fee schedule amount. 

3 U.S. General Accounting Office, “Use of Revised ‘Inherent Reasonableness’ Process 

Generally Appropriate,” GAO/HEHS-00-79, July 2000, p.4. 

4 Ibid, p.21 

OEI - 03 - 02 - 00700 MEDICARE P AYMENTS FOR E NTERAL NUTRITION 3 
INT RODUCTION 

Medicare Prescription Drug, Improvement, and Modernization Act of 2003 

Since completion of our evaluation, the Medicare Prescription Drug, 

Improvement, and Modernization Act of 2003 (the Act) was signed into 

law (Public Law 108-173). In part, the Act directs the Secretary of the 

Department of Health and Human Services (HHS) to establish a 

program for competitive acquisition of durable medical equipment and 

supplies. This program, which will be phased in beginning in 2007, will 

replace fee schedules for covered items. The HHS Secretary is 

authorized to exempt items and services where competitive acquisition 

would not likely result in significant savings. Because this program has 

yet to be developed and implemented, it is premature to speculate about 

its impact on reimbursement for enteral nutrition and supplies; 

however, it bears noting that competitive acquisition could reform how 

Medicare reimburses for enteral nutrition, equipment, and supplies. 

Supplier Acquisition Costs for Enteral Nutrition Formulas 

Suppliers may purchase enteral nutrition formulas from sources such as 

wholesalers, group purchasing organizations, and directly from 

manufacturers. Wholesalers purchase large quantities of medical 

equipment and supplies at discounted rates from manufacturers and 

sell these products to suppliers. A group purchasing organization uses 

the combined buying power of its members to negotiate advantageous 

prices for medical equipment and supplies from manufacturers. 

Members of the group purchasing organization then purchase the 

products they need from the manufacturers or from wholesalers that 

accept the negotiated prices. Suppliers may also obtain enteral 

nutrition formulas directly from manufacturers. Prices charged to 

individual suppliers are often based on the volume of the product 

purchased. 

METHODOLOGY 

Sources of Contract Prices for Enteral Nutrition Formulas 

We obtained contract prices for Category I enteral nutrition formula 

products offered through a national wholesaler and a group purchasing 

organization. These contracts were with four enteral nutrition formula 

manufacturers – Mead Johnson, Nestlé, Novartis, and Ross. The 

wholesaler is one of the largest distributors of medical and surgical 

products in the United States and serves more than 85,000 customers. 

The group purchasing organization serves over 2,300 non-hospital 

health care providers across the Nation. We also obtained information 

OEI - 03 - 02 - 00700 MEDICARE P AYMENTS FOR E NTERAL NUTRITION 4 
INTRODUCTION 

on one supplier’s contract prices that the supplier negotiated directly 

with two enteral formula manufacturers – Novartis and Ross. 

The contracts included prices for many different types of enteral 

nutrition formulas, including liquid formulas packaged in 250 milliliter 

(mL) and 1000 mL cans, 1000 mL and 1500 mL pre-filled containers, 

and 237 mL Tetra Brik Paks®. Contracts also included prices for 

powdered formulas packaged in 1-pound and 4.5-pound cans. 

Comparing Contract Prices to Medicare Payment Amount 

The 177 individual contract prices reviewed were listed as “per case” or 

“per unit” prices. Medicare’s reimbursement amount for Category I 

enteral nutrition products is for 100 calories of formula. As shown in 

the example in Table 2 below, in order to compare contract prices to 

Medicare’s reimbursement amount, we converted each contract price 

into a price per 100 calories of formula. We researched manufacturer 

literature for each enteral nutrition formula product to determine the 

number of calories in a case or unit of product. We determined the price 

per calorie by dividing the contract price of the case or unit of product 

by the number of calories in the case or unit. We multiplied the 

product’s price per calorie by 100 to determine the contract price per 100 

calories. 

Table 2. Calculation of Contract Price per 100 Calories 

A B C D E 

Contract Price 

per Case 

Cans 

per Case 

Calories 

per Can 

Calories 

per Case 

B*C 

Contract Price 

per 100 Calories 

(A/D)*100 

$19.00 24 300 7200 $0.26 

Source: Review of Contract Prices, Office of Evaluation and Inspections, 2003. 

Note: Currency figures in the table have been rounded. 

Calculating Potential Medicare Savings 

We calculated how much Medicare and its beneficiaries would save if 

the reimbursement amount for Category I formulas were set at the 

median of purchase prices reviewed. We determined the percentage 

difference in prices for each source by subtracting the median of 

contract prices for Category I formulas from Medicare’s national 

reimbursement amount in 2001 ($0.61) and then dividing this number 

by Medicare’s reimbursement amount. We multiplied these percentage 

differences by total Medicare Part B payments for Category I formulas 

in 2001 in order to compute potential program savings. Medicare 

allowance data were obtained from CMS’s National Claims History File. 

OEI - 03 - 02 - 00700 MEDICARE P AYMENTS FOR E NTERAL NUTRITION 5 
INTRODUCTION 

The data used to calculate potential Medicare and beneficiary savings 

are presented in Appendix A. 

Limitations of Contract Price Data 

We did not collect data from suppliers regarding any additional supplier 

costs related to furnishing enteral nutrition formula to Medicare 

beneficiaries. Therefore, the median contract prices do not include 

these associated supplier costs. The estimates of potential program 

savings presented in the findings of this report would be lower if median 

contract prices had included associated supplier costs. 

OEI - 03 - 02 - 00700 MEDICARE P AYMENTS FOR E NTERAL NUTRITION 6 
OEI - 03 - 02 - 00700 MEDICARE P AYMENTS FOR E NTERAL NUTRITION 7

An analysis of contract prices 

available to suppliers from one 

wholesaler and one group 

purchasing organization, and 

contract prices negotiated by one 

supplier directly with enteral 

nutrition formula manufacturers indicated that the Medicare payment 

amount for Category I formulas exceeded median contract prices by 70 

to 115 percent. Of the three sources reviewed, the supplier who 

negotiated prices directly with manufacturers obtained the lowest 

median contract price for Category I formulas.

Individual contract prices for Category I formulas varied widely, from a 

low of $0.18 per unit to a high of $0.86 per unit. Contract prices for only 

three products exceeded the Medicare reimbursement amount of $0.61 

per unit. Seventy-five percent of individual contract prices were lower 

than $0.42 per unit. If Medicare’s payment amount for these formulas 

had been set at the median of purchase prices reviewed, we estimate 

that the program and its beneficiaries could have saved over $82 million 

in calendar year 2001. The actual savings to Medicare and its 

beneficiaries would likely be lower than the estimate of potential 

savings, since this estimate does not account for any additional supplier 

costs related to enteral nutrition formulas. Table 3 presents a summary 

of our comparison of contract prices to Medicare’s payment amount and 

our estimates of potential program savings.

Medicare’s reimbursement amount for 

Category I enteral nutrition formulas exceeded 

the median of purchase prices reviewed by as 

much as 115 percent.

0 FINDINGS

Contract Price Source

Median

Source Price

Per Unit

Range of

Prices

Per Unit 

Medicare 

Reimbursement 

Compared to Median 

Source Price

Potential Annual 

Medicare and 

Beneficiary Savings

Medicare National Fee Schedule $0.61 NA NA NA

Group Purchasing Organization $0.36 $0.18 to $0.81 71% Higher $83,591,036

Wholesaler $0.34 $0.18 to $0.86 77% Higher $87,531,798

Supplier Contracts with Manufacturers

30+ cases of product/month $0.28 $0.19 to $0.57 115% Higher $107,587,201

10-29 cases of product/month $0.29 $0.19 to $0.60 108% Higher $104,225,101

1-9 cases of product/month $0.36 $0.19 to $0.72 70% Higher $82,898,839

Note: All figures in the table have been rounded.

Table 3. Comparison of Contract Prices to Medicare Payment Amount

Source: Review of Contract Prices, Office of Evaluation and Inspections, 2003.
FINDINGS FINDINGS 

Members of one group purchasing organization were able to obtain 

Category I formulas for a median price of $0.36 per unit. 

The group purchasing organization contracts we reviewed contained 

prices for 88 individual Category I enteral nutrition formulas. We found 

that suppliers who are members of this group purchasing organization 

were able to purchase Category I formulas for a median contract price of 

$0.36 per unit. 

The group purchasing organization’s contract prices for 86 of 88 

individual formula products ranged from $0.18 per unit for Meritene® 

powdered formula to $0.48 per unit for Resource® Just for Kids with 

Fiber – a pediatric formula packaged in Tetra Brik® Paks. Medicare’s 

reimbursement amount was 26 percent to 231 percent higher than 

individual product prices available to the group purchasing organization 

members. For two products, contract prices exceeded Medicare’s 

reimbursement amount. Portagen® powdered formula was priced at 

$0.81 per unit; and Introlite® – a half-calorie liquid formula used to 

introduce tube feeding – was priced at $0.74 per unit. 

Suppliers were able to obtain Category I formulas from one wholesaler 

for a median price of $0.34 per unit. 

We arrayed wholesale contract prices for 41 individual Category I 

enteral nutrition formulas and found that suppliers were able to obtain 

these products for a median contract price of $0.34 per unit, compared 

to the Medicare payment amount of $0.61 per unit. 

The wholesaler’s contract prices for 40 of 41 individual formula products 

ranged from $0.18 per unit for a standard, canned, tube-feeding formula 

called Isosource® to $0.49 per unit for Glytrol® – a formula for patients 

with hyperglycemia – in pre-filled sterile containers. Medicare’s 

payment amount of $0.61 per unit was 25 percent to 235 percent higher 

than these wholesale contract prices. At $0.86 per unit, a specialty 

powdered formula called Portagen® was the only product with a 

wholesale contract price that exceeded the Medicare payment amount. 

One supplier was able to purchase Category I formulas for a median 

price of as low as $0.28 per unit by negotiating directly with formula 

manufacturers. 

We reviewed contracts for enteral nutrition products that one supplier 

negotiated directly with two formula manufacturers. Rather than 

listing a single contract price, one of the two manufacturers provided 

the supplier with three contract prices for each product. The three 

contract prices were based on the number of cases of the product the 

OEI - 03 - 02 - 00700 MEDICARE P AYMENTS FOR E NTERAL NUTRITION 8 
FINDINGS FINDINGS 

supplier ordered in 1 month. The larger the volume of formula 

purchased per month, the lower the per unit contract price (see Table 3). 

If the supplier purchased one to nine cases of a particular Category I 

formula each month, it paid a median price of $0.36 per unit. For 10 to 

29 cases each month, the supplier paid $0.29 per unit. For 30 or more 

cases of a Category I formula each month, the supplier paid $0.28 per 

unit. 

At 1 to 9 cases per month, manufacturers’ contract prices for 46 of 48 

individual formula products ranged from $0.19 per unit for Meritene® 

powdered formula to $0.58 per unit for a canned pediatric product called 

Pediasure® Enteral Formula. Medicare’s reimbursement amount was 6 

percent to 218 percent higher than these individual product prices. 

Contract prices for two products – Introlite® and Pediasure® Enteral 

Formula with Fiber – exceeded Medicare’s reimbursement amount. At 

10 to 29 cases per month and 30 or more cases per month, all of the 

manufacturers’ contract prices were lower than the Medicare payment 

amount of $0.61 per unit. 

OEI - 03 - 02 - 00700 MEDICARE P AYMENTS FOR E NTERAL NUTRITION 9 
� RECOMMENDATION

RECOMMENDATION 

The findings of this report suggest that the supplier community obtains 

Category I enteral nutrition formula products at prices that are lower 

than Medicare’s reimbursement amount. If Medicare’s reimbursement 

amount had been based more closely on these prices, the program and 

its beneficiaries could have realized savings. 

CMS had attempted to reduce Medicare payments for enteral nutrition 

formulas through the use of its inherent reasonableness authority. 

However, Congress suspended the use of the inherent reasonableness 

authority in the 1999 Medicare, Medicaid, and SCHIP Balanced Budget 

Refinement Act before payment reductions could be implemented. In 

December 2002, CMS published an interim final rule on the use of 

inherent reasonableness authority. This rule, which became effective in 

February 2003, allows CMS contractors to raise or lower Medicare 

payment amounts for medical equipment and supplies by 15 percent in 

any given year without a formal rulemaking process. 

We believe that continued CMS attention to Medicare Part B payments 

for Category I enteral nutrition formulas is warranted. Since CMS now 

has the authority to implement inherent reasonableness reductions, we 

recommend that CMS: 

Consider using its inherent reasonableness authority to reduce the 

Medicare reimbursement amount for Category I enteral nutrition formulas. 

CMS may want to begin an inherent reasonableness review by collecting 

information from Medicare suppliers to identify the specific Category I 

enteral nutrition formulas that suppliers provide to Medicare 

beneficiaries. CMS may also want to collect information from suppliers 

to determine suppliers’ purchase costs for the specific formulas used by 

Medicare beneficiaries. 

Agency Comments 

CMS agreed with our recommendation that it consider using inherent 

reasonableness authority to reduce the reimbursement amount for 

Category I formulas. CMS noted that it will not be able to initiate 

inherent reasonableness reviews until its contractor develops written 

procedures for conducting these reviews according to the statute and 

regulation. 

OEI - 03 - 02 - 00700 MEDICARE P AYMENTS FOR E NTERAL NUTRITION 10 
APPENDIX~A

Calculation of Potential Savings for Category I Enteral Nutrition Formulas 

1. To determine percentage differences between contract prices for Category I enteral 

nutrition formulas and Medicare’s reimbursement amount, we subtracted the 

median price for each source from the Medicare reimbursement amount. We then 

divided this number by the Medicare reimbursement amount. 

2. To calculate potential Medicare and beneficiary savings by price source, we 

multiplied total Medicare Par t B allowances ($201,066,767) for Category I enteral 

nutrition formulas in 2001 by the percentage differences. 

Calculation of Potential Savings for Category I Enteral Nutrition Formulas 

A B C D E F 

Contract Price Source 

Median 

Source Price 

per 100 

Calories 

Medicare 

Reimbursement 

per 100 Calories 

Median Source Price 

Compared to Medicare 

Reimbursement 

((C-B)/C)*100 

2001 Medicare 

Part B 

Allowances for 

Category I 

Formulas 

Potential Annual 

Medicare and 

Beneficiary Savings 

D*E 

Group Purchasing Organization $0.36 $0.61 41.57% Lower $201,066,767 $83,591,036 

Wholesaler $0.34 $0.61 43.53% Lower $201,066,767 $87,531,798 

Supplier Contracts with Manufacturers 

30+ cases of product per month $0.28 $0.61 53.51% Lower $201,066,767 $107,587,201 

10-29 cases of product per month $0.29 $0.61 51.84% Lower $201,066,767 $104,225,101 

1-9 cases of product per month $0.36 $0.61 41.23% Lower $201,066,767 $82,898,839 

Sources: Review of Contract Prices, Office of Evaluation and Inspections, 2003; CMS's National Claims History File 

Note: Median source prices, percentages, and potential savings amounts in the table have been rounded. 

OEI - 03 - 02 - 00700 MEDICARE P AYMENTS FOR E NTERAL NUTRITION 11 
APPENDIX~B

Centers for Medicare & Medicaid Services’ Comments 

OEI - 03 - 02 - 00700 MEDICARE P AYMENTS FOR E NTERAL NUTRITION 12
APPENDIX~B 

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� ACKNOWLEDGMENTS

This report was prepared under the direction of Robert A. Vito, Regional 

Inspector General for Evaluation and Inspections in the Philadelphia 

Regional Office, and Linda M. Ragone, Deputy Regional Inspector 

General. Other principal Office of Evaluation and Inspections staff who 

contributed include: 

Amy Sernyak, Project Leader 

Tanaz Dutia, Program Analyst 

Stephanie Lattin London, Program Specialist 

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