Department of Health and Human Services 

OFFICE OF 

INSPECTOR GENERAL 

JUNE GIBBS BROWN 

Inspector General 

JUNE 2000 

OEI-03-00-00311 

Medicare Reimbursement of Albuterol 
OFFICE OF INSPECTOR GENERAL 

The mission of the Office of Inspector General (OIG), as mandated by Public Law 95-452, is to 

protect the integrity of the Department of Health and Human Services programs as well as the 

health and welfare of beneficiaries served by them. This statutory mission is carried out through a 

nationwide program of audits, investigations, inspections, sanctions, and fraud alerts. The 

Inspector General informs the Secretary of program and management problems and recommends 

legislative, regulatory, and operational approaches to correct them. 

Office of Evaluation and Inspections 

The Office of Evaluation and Inspections (OEI) is one of several components of the Office of 

Inspector General. It conducts short-term management and program evaluations (called 

inspections) that focus on issues of concern to the Department, the Congress, and the public. The 

inspection reports provide findings and recommendations on the efficiency, vulnerability, and 

effectiveness of departmental programs. 

OEI's Philadelphia Regional Office prepared this report under the direction of Robert A. Vito, 

Regional Inspector General, and Linda M. Ragone, Deputy Regional Inspector General. Principal 

OEI staff included: 

REGION HEADQUARTERS 

David Tawes, Project Leader Stuart Wright, Program Specialist 

Tara Schmerling, Program Analyst Linda Moscoe, Technical Support Staff 

To obtain copies of this report, please call the Philadelphia Regional Office at (800) 531-9562. 

Reports are also available on the World Wide Web at our home page address: 

http://www.dhhs.gov/progorg/oei 
EXECUTIVE SUMMARY 

PURPOSE 

This report compares the amount Medicare reimburses for albuterol with (1) the amounts 

reimbursed by Medicaid and the Department of Veterans Affairs, and (2) prices available 

at pharmacies. 

BACKGROUND 

Medicare does not pay for over-the-counter or most outpatient prescription drugs. 

However, Medicare Part B will cover drugs which are necessary for the effective use of 

durable medical equipment (DME). One such drug, albuterol, is commonly used with a 

nebulizer to treat patients suffering from asthma or emphysema. Medicare allowed 

approximately $246 million for albuterol in 1999. 

The Health Care Financing Administration (HCFA) contracts with four DME regional 

carriers who determine reimbursement amounts for nebulizer drugs. In general, the 

Medicare reimbursement amount for a covered drug is 95 percent of the drug’s average 

wholesale price (AWP). Of this amount, Medicare pays 80 percent while the beneficiary is 

responsible for a 20 percent copayment. Each State Medicaid agency has the authority to 

develop its own drug reimbursement methodology subject to upper limits set by HCFA. 

Additionally, Medicaid receives rebates from drug manufacturers as required by Federal 

law. Unlike Medicare and Medicaid, the Department of Veterans Affairs (VA) purchases 

drugs for its healthcare system directly from manufacturers or wholesalers. There are 

several purchase options available to the VA, including the Federal Supply Schedule, 

Blanket Purchase Agreements, and VA national contracts. 

We obtained reimbursement amounts for albuterol from Medicare, Medicaid, and the VA. 

We also determined retail prices for albuterol by contacting chain and Internet pharmacies. 

We compared Medicare’s current reimbursement amount for albuterol to amounts 

reimbursed by Medicaid and the VA, and prices available at pharmacies. 

FINDINGS 

Medicare and its beneficiaries would save $120 million or $209 million a year if 

albuterol was reimbursed at amounts available through other Federal sources 

The Medicare reimbursement amount for albuterol is almost seven times greater than the 

VA price. The VA purchases generic albuterol through the Federal Supply Schedule for 

only $0.07 per milligram (mg), while Medicare reimburses at $0.47 per mg. We estimate 

Medicare Reimbursement of Albuterol 1 OEI-03-00-00311 
that Medicare and its beneficiaries would save $209 million a year if reimbursement for 

albuterol was set at the amount available to the VA under the Federal Supply Schedule. 

Medicare’s reimbursement amount for albuterol is almost double Medicaid’s upper limit of 

$0.24 per mg. We estimate that Medicare and its beneficiaries would save $120 million if 

Medicare’s reimbursement amount for albuterol equaled Medicaid’s upper limit amount. 

Medicare and its beneficiaries would save $47 million or $115 million a year if 

Medicare reimbursed albuterol at prices available at chain and Internet 

pharmacies 

Customers walking into nearly all of the chain pharmacies we contacted would pay less 

than the Medicare reimbursement amount for albuterol. Prices at these pharmacies ranged 

from a low of $0.24 cents per mg to a high of $0.48 per mg for a single box supply. If 

Medicare reimbursement was set at the pharmacies’ median price of $0.38 per mg, 

Medicare and its beneficiaries could save $47 million a year on albuterol. Some 

pharmacies offered even lower prices for larger quantity purchases. Prices for albuterol at 

the Internet pharmacies we visited ranged from $0.21 to $0.31 per mg for a single box 

supply. Medicare would save almost $115 million a year if its reimbursement amount for 

albuterol equaled the median Internet pharmacy price of $0.25 per mg. As with the chain 

pharmacies, discounts for larger quantity purchases were sometimes available. 

RECOMMENDATION 

The information in this report adds to the evidence which shows that Medicare pays too 

much for albuterol. The finding that Medicare pays more than the VA for albuterol is not 

surprising since the VA acts as a purchaser of drugs while Medicare reimburses suppliers 

after-the-fact. Even allowing for this difference in payment methods, Medicare’s 

reimbursement amount for albuterol — almost seven times higher than the cost of the drug 

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

more in just monthly copayments for albuterol than the VA pays for a whole month’s 

supply of the drug. Medicaid, which reimburses for drugs in a manner similar to 

Medicare, has a federally-mandated upper limit for albuterol. The upper limit amount 

established by HCFA is about half of the Medicare amount. In addition, anyone with a 

prescription can walk into a retail chain pharmacy or visit an Internet pharmacy and pay a 

price for albuterol which is usually below the Medicare reimbursement amount. These 

findings raise serious doubts about the accuracy and efficacy of Medicare’s payment 

policy. 

This report found that Medicare would save between $47 million and $209 million by 

lowering its reimbursement amount for albuterol to prices available through other sources. 

It is important to note that 20 percent of these savings would directly benefit Medicare 

beneficiaries through reduced copayments. 

Medicare Reimbursement of Albuterol 2 OEI-03-00-00311 
We continue to support the need for lower albuterol prices for the Medicare program and 

its beneficiaries. We realize, however, that HCFA’s power to lower drug prices through 

the use of its inherent reasonableness authority was recently limited by a provision of the 

Medicare, Medicaid, and SCHIP Balanced Budget Refinement Act of 1999. In past 

reports, we recommended a number of other options for lowering albuterol payments. 

These recommendations included (1) greater discounting of AWPs, (2) basing payments 

on supplier acquisition costs, (3) establishing manufacturers’ rebates, and (4) using 

competitive bidding. We continue to strongly believe that action needs to be taken to 

lower unreasonable drug reimbursement amounts. 

Agency Comments 

The HCFA concurred with our recommendation, noting that basing reimbursement on 

acquisition cost is probably the best way to ensure that Medicare pays fair prices for 

covered drugs. Additionally, HCFA gave a detailed account of their numerous attempts 

to lower unreasonable drug reimbursement amounts in the Medicare program. Currently, 

HCFA plans to utilize a number of more accurate drug prices developed by First 

Databank, publisher of a pricing compendium used by the pharmaceutical industry. HCFA 

requested that Medicare contractors use these prices when calculating their drug 

reimbursement amounts. The HCFA also commented that they are working to develop a 

comprehensive electronic file on the pricing of Medicare covered drugs, and are 

continuing a competitive bidding demonstration project for albuterol in Texas. In 

addition, HCFA is consulting with the Department of Justice and the Office of Inspector 

General on the feasibility of developing additional means to ensure that accurate drug 

pricing data is used in setting Medicare reimbursement rates. The full text of HCFA’s 

comments is presented in Appendix E. 

We commend HCFA’s efforts to lower Medicare drug reimbursement rates. We fully 

support attempts to obtain more accurate prices for the Medicare program. We believe 

that HCFA’s request that Medicare contractors use the more accurate prices supplied by 

First Databank is a significant first step towards reimbursing drugs in a more appropriate 

manner. 

Medicare Reimbursement of Albuterol 3 OEI-03-00-00311 
TABLE OF CONTENTS 

PAGE

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

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

FINDINGS

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

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

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

APPENDICES

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

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

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

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

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

Medicare Reimbursement of Albuterol 4 OEI-03-00-00311 
INTRODUCTION 

PURPOSE 

This report compares the amount Medicare reimburses for albuterol with (1) the amounts 

reimbursed by Medicaid and the Department of Veterans Affairs, and (2) prices available 

at pharmacies. 

BACKGROUND 

Medicare Coverage of Albuterol 

Medicare does not pay for over-the-counter or most outpatient prescription drugs. 

However, Medicare Part B will cover drugs which are necessary for the effective use of 

durable medical equipment (DME). One such drug, albuterol, is commonly used with a 

nebulizer to treat patients suffering from asthma or emphysema. Medicare allowed 

approximately $246 million for albuterol in 1999, which represents nearly half of the $545 

million allowed for all nebulizer drugs that year. 

Medicare Drug Reimbursement 

The Health Care Financing Administration (HCFA), which administers the Medicare 

program, contracts with four DME regional carriers (DMERCs) to process all claims for 

durable medical equipment and associated supplies, including nebulizer drugs. Each 

DMERC is responsible for determining the reimbursement amount for equipment and 

supplies in their respective region based on Medicare’s reimbursement methodology. 

Medicare’s current reimbursement methodology for prescription drugs is defined by 

Section 4556 of the Balanced Budget Act of 1997. The DMERCs base their 

reimbursement amount for a covered drug on its average wholesale price (AWP) as 

published in Drug Topics Red Book or similar pricing publications used by the 

pharmaceutical industry. If a drug is available only in brand form, reimbursement is 

calculated by taking 95 percent of the drug’s AWP. For drugs like albuterol that have 

both brand and generic sources available, reimbursement is based on 95 percent of the 

median AWP for generic sources. However, if a brand name product’s AWP is lower 

than the median generic price, Medicare reimburses 95 percent of the lowest brand price. 

Section 4316 of the Balanced Budget Act of 1997 allows HCFA to diverge from the 

statutorily-defined payment method if the method results in payment amounts which are 

not inherently reasonable. However, HCFA’s ability to use its inherent reasonableness 

authority was recently limited by a provision of the Medicare, Medicaid, and SCHIP 

Balanced Budget Refinement Act of 1999. This provision requires the General 

Medicare Reimbursement of Albuterol 5 OEI-03-00-00311 
Accounting Office (GAO) to complete a study on the potential effects of using inherent 

reasonableness measures before HCFA can invoke the authority. The Department of 

Health and Human Services must then publish a notice of final rule-making concerning 

inherent reasonableness in the Federal Register. This notice must respond to both the 

GAO study and any comments received on the interim inherent reasonableness regulation. 

The Act also requires that the Department reevaluate the appropriateness of the criteria 

used to identify unreasonable payments, and take steps to ensure the use of valid and 

reliable data when exercising the inherent reasonableness authority. 

Medicaid Drug Reimbursement 

Each State Medicaid agency has the authority to develop its own drug reimbursement 

methodology subject to upper limits set by HCFA. Like Medicare, most Medicaid 

agencies use a discounted AWP as the basis for calculating drug reimbursement amounts. 

Medicaid agencies generally use a more deeply-discounted AWP than does Medicare. 

However, HCFA has established a Medicaid upper limit for albuterol. The payments for 

albuterol and other drugs with Federal upper limits must not exceed, in the aggregate, the 

established upper limit amounts. The HCFA sets the upper limit for a drug at 150 percent 

of the lowest price listed in any of the drug pricing compendia. 

Additionally, Medicaid receives rebates from drug manufacturers as required by Federal 

law. In 1999, the quarterly rebate for brand-name drugs was based on either 15.1 percent 

of the average manufacturer price (AMP) or the difference between the AMP and the best 

price, whichever was greater. The AMP is the average price paid by wholesalers for 

products distributed for retail trade. The best price is the lowest price paid by any 

purchaser with the exception of Federal agencies and State pharmaceutical assistance 

programs. The rebate amount for generic drugs was 11 percent of AMP. 

Department of Veterans Affairs Drug Reimbursement 

Unlike Medicare and Medicaid, the Department of Veterans Affairs (VA) purchases drugs 

for its healthcare system directly from manufacturers or wholesalers. There are several 

purchase options available to the VA, including the Federal Supply Schedule, Blanket 

Purchase Agreements, and VA national contracts. 

The Federal Supply Schedule provides agencies like the VA with a simple process for 

purchasing commonly-used products in various quantities while still obtaining the 

discounts associated with volume buying. Using competitive procedures, contracts are 

awarded to companies to provide services and supplies at the Federal Supply Schedule 

price over a given period of time. Agencies are not required to use the Federal Supply 

Schedule, however, and are sometimes able to negotiate prices lower than the Federal 

Supply Schedule price. 

Medicare Reimbursement of Albuterol 6 OEI-03-00-00311 
Related Work by the Office of Inspector General 

The Office of Inspector General (OIG) has studied a number of issues relating to Medicare 

reimbursement of albuterol. Brief summaries of selected studies are presented in 

Appendix A. 

METHODOLOGY 

Medicare Reimbursement Amounts 

Medicare identifies covered drugs using codes in HCFA’s Common Procedure Coding 

System (HCPCS). The HCPCS codes define the type of drug and, in most cases, a dosage 

amount. There are currently two HCPCS codes for albuterol, one for a unit dose solution 

and another for a concentrated solution. Because nearly all of the billing for albuterol is 

for the unit dose form of the drug, we only reviewed the reimbursement amounts for the 

unit dose code. The term “unit dose” refers to a solution of 0.083 percent albuterol. 

As of January 2000, the HCPCS code for the unit dose form of albuterol is J7619. This 

code is defined as, “albuterol, inhalation solution administered through DME, unit dose 

form, per milligram.” In 1999, HCPCS code K0505 was used to bill for the unit dose 

form of albuterol. The HCPCS code definition of K0505 is identical to J7619. 

We obtained current fee schedule reimbursement amounts for HCPCS code J7619 from 

the four DMERCs. The reimbursement amount for albuterol was the same for each of the 

four DMERCs. For the purpose of this report, Medicare’s reimbursement amount 

includes both the 80 percent Medicare payment and the 20 percent beneficiary copayment. 

Matching HCPCS Codes to National Drug Codes 

Unlike Medicare, Medicaid and the VA use national drug codes (NDCs) rather than 

HCPCS codes to identify drugs products. Because of these coding differences, we used 

the January 2000 CD-ROM edition of Drug Topics Red Book to identify the specific 

NDCs that would match the HCPCS code definition for albuterol. Each drug 

manufactured or distributed in the United States has a unique NDC. The NDCs identify 

the manufacturer of the drug, the product dosage form, and the package size. From the 

NDCs, the drugs can be identified as either brand or generic. Because Medicare uses 

generic products to determine its reimbursement amount for albuterol, we only selected 

generic albuterol NDCs. We found 17 NDCs for generic albuterol which matched the 

HCPCS definition of J7619. 

Medicare Reimbursement of Albuterol 7 OEI-03-00-00311 
Medicaid Reimbursement Amounts 

We obtained from HCFA the Medicaid upper limit amount for albuterol as of April 1, 

2000. We also accessed the Medicaid Drug Rebate Initiative system to determine the 

Medicaid rebate amounts for albuterol. We used the most recent rebate amounts available 

for each NDC code, which in most cases was the fourth quarter of 1999. Four of the 17 

NDCs reviewed did not have any rebate information available. We calculated the median 

milliliter (ml) rebate amount for the remaining 13 NDCs in order to determine a single 

Medicaid rebate amount. 

VA Pricing 

To determine the VA’s fourth quarter 1999 costs for albuterol, we obtained a file from the 

VA containing their contracted prices. The VA pricing file contained Federal Supply 

Schedule prices for 7 of the 17 matching albuterol NDCs. To determine a single VA 

price, we calculated the median price per ml for these seven NDCs. 

Pharmacy Pricing 

We contacted three chain pharmacies in each of eight cities (Atlanta, Boston, Chicago, 

Dallas, Kansas City, New York, Philadelphia, and San Francisco). We also visited the 

websites of three Internet pharmacies. Our review of the applicable NDCs indicates that 

the smallest amount of unit dose albuterol available for purchase is 75 ml, which is usually 

supplied in one box of twenty-five 3 ml vials. Therefore, we requested that the 

pharmacies provide their price for this amount of the drug. To determine if there were 

volume discounts available, we asked for the price of four boxes of albuterol (300 ml), 

which is a typical monthly usage amount for the drug. We then calculated the median 

price per ml of a single box supply for both chain and Internet pharmacies. 

Conversion of Prices 

The HCPCS code for the unit dose form of albuterol, J7619, is reimbursed per milligram 

(mg). Medicaid’s upper limit is based on 1 ml of 0.083 percent albuterol solution. The 

NDCs used to determine the Medicaid rebates, VA prices, and pharmacy prices were all 

based on 3 ml vials of 0.083 percent albuterol solution. Consequently, we needed to 

convert milliliter prices of albuterol into milligram prices. 

A 3 ml vial of 0.083 percent albuterol solution contains 2.5 mg of albuterol. Therefore, 1 

ml of solution contains 0.833 mg of albuterol (2.5 divided by 3). After determining a per 

ml price for albuterol from each of the sources, we converted this to a per mg price simply 

by dividing the per ml price by 0.833. For example, by dividing the Medicaid upper limit 

price of $0.20 per ml by 0.833, we calculated that the Medicaid upper limit price equals 

$0.24 per milligram. 

Medicare Reimbursement of Albuterol 8 OEI-03-00-00311 
Calculating Potential Medicare Savings 

To calculate potential Medicare savings, we compared Medicare’s reimbursement amount 

for albuterol to amounts available at the VA, Medicaid, chain pharmacies, and Internet 

pharmacies. We determined the percentage difference in prices by subtracting the source 

price from the Medicare price, and then dividing this number by the Medicare price. 

These percentages indicate how much Medicare would save if reimbursement for albuterol 

was based on prices provided by other sources. We then multiplied these percentages by 

Medicare’s 1999 allowed charges for albuterol in order to calculate dollar savings. A 

table showing the data used to calculate potential savings is presented in Appendix B. 

Medicare Reimbursement of Albuterol 9 OEI-03-00-00311 
FINDINGS 

Medicare and its beneficiaries would save $120 million or 

$209 million a year if albuterol was reimbursed at amounts 

available through other Federal sources 

The Medicare reimbursement amount for albuterol is almost seven times greater 

than the VA price 

The median Federal Supply Schedule price available to the VA for generic albuterol is 

only $0.07 per mg, compared to $0.47 per mg for Medicare. We estimate that Medicare 

and its beneficiaries would save $209 million a year if reimbursement for albuterol was set 

at the amount available to the VA under the Federal Supply Schedule. This savings 

represents 85 percent of the $246 million in Medicare allowed charges for albuterol in 

1999. A Medicare beneficiary using 250 mg of albuterol per month would pay more in 

just the Medicare copayment ($23.50) than the VA would pay ($17.50) to purchase the 

drug outright. Table 1 below compares the Medicare reimbursement amount to prices 

available through other sources. It also provides potential Medicare savings and 

beneficiary copayments based on various reimbursement levels. 

TABLE 1: COMPARISON OF ALBUTEROL PRICES 

Pricing Source Price 

per mg Individual Monthly 

Cost of Typical 

Usage (250 mg) 

Copayment Based on 

Monthly Beneficiary 

Source Price 

Medicare and 

Potential Annual 

Beneficiary Savings 

Medicare Reimbursement 

Amount $0.47 $117.50 $23.50 N/A 

Department of Veterans 

Affairs Median Cost $0.07 $17.50 $3.50 $209,478,193 

Medicaid Upper Limit 

Amount $0.24 $60.00 $12.00 $120,449,961 

Chain Pharmacy Median 

Price $0.38 $95.00 $19.00 $47,132,593 

Internet Pharmacy 

Median Price $0.25 $62.50 $12.50 $115,213,006 

The Medicare reimbursement amount for albuterol is nearly twice the Medicaid 

reimbursement amount 

The HCFA has set Medicaid’s upper limit for albuterol at $0.24 per mg, yet Medicare 

DMERCs reimburse albuterol at $0.47 per mg. We estimate that Medicare and its 

Medicare Reimbursement of Albuterol 10 OEI-03-00-00311 
beneficiaries would save $120 million a year if Medicare’s reimbursement amount for 

albuterol equaled Medicaid’s upper limit amount. These potential savings represent 

almost one-half of Medicare allowed charges for albuterol in 1999. 

In addition to the lower reimbursement amount, Medicaid also receives a rebate for 

generic albuterol of approximately $0.01 per mg. This would create an additional $5.2 

million in savings a year for Medicare. 

Medicare and its beneficiaries would save $47 million or 

$115 million a year if Medicare reimbursed albuterol at prices 

available at chain and Internet pharmacies 

Customers walking into nearly all of the chain pharmacies we contacted would 

pay less than the Medicare reimbursement amount for albuterol 

Twenty-two of the 24 pharmacies we contacted charge customers less than the Medicare 

reimbursement amount for albuterol. Prices at the 24 chain pharmacies ranged from a low 

of $0.25 cents per mg to a high of $0.48 per mg for a single box supply. Based on the 24 

pharmacies’ median price of $0.38 per mg, Medicare and its beneficiaries would save $47 

million a year on albuterol. 

Some pharmacies offered even lower prices for larger quantities of the drug. For example, 

one chain pharmacy offered four boxes of albuterol (a typical monthly supply) for $35.94, 

a cost of only $0.14 per mg. Medicare would have reimbursed $117.50 for the same 

amount. If Medicare reimbursed albuterol at $0.14 per mg, it would save 70 percent of 

current albuterol payments. The prices for albuterol available at the chain pharmacies we 

contacted are presented in Appendix C. 

Customers purchasing albuterol at Internet pharmacies would pay lower prices 

than Medicare 

Prices for albuterol at the Internet pharmacies we visited ranged from $0.21 to $0.31 per 

mg for a single box supply. Medicare would save almost $115 million a year if its 

reimbursement amount for albuterol equaled the median Internet pharmacy price of $0.25 

per mg. As with the chain pharmacies, discounts for larger quantity purchases were 

sometimes available. The lowest price found for a four-box supply of albuterol was 

$41.94, a cost of $0.17 per mg. If Medicare reimbursed albuterol at $0.17 per mg, it 

would save 64 percent of current albuterol payments. The prices for albuterol at each of 

the Internet pharmacies we contacted are presented in Appendix D. 

Medicare Reimbursement of Albuterol 11 OEI-03-00-00311 
RECOMMENDATION 

The information in this report adds to the evidence which shows that Medicare pays too 

much for albuterol. The finding that Medicare pays more than the VA for albuterol is not 

surprising since the VA acts as a purchaser of drugs while Medicare reimburses suppliers 

after-the-fact. Even allowing for this difference in payment methods, Medicare’s 

reimbursement amount for albuterol — almost seven times higher than the cost of the drug 

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

more in just monthly copayments for albuterol than the VA pays for a whole month’s 

supply of the drug. Medicaid, which reimburses for drugs in a manner similar to 

Medicare, has a federally-mandated upper limit for albuterol. The upper limit amount 

established by HCFA is about half of the Medicare amount. In addition, anyone with a 

prescription can walk into a retail chain pharmacy or visit an Internet pharmacy and pay a 

price for albuterol which is usually below the Medicare reimbursement amount. These 

findings raise serious doubts about the accuracy and efficacy of Medicare’s payment 

policy. 

This report found that Medicare would save between $47 million and $209 million by 

lowering its reimbursement amount for albuterol to prices available through other sources. 

It is important to note that 20 percent of these savings would directly benefit Medicare 

beneficiaries through reduced copayments. 

We continue to support the need for lower albuterol prices for the Medicare program and 

its beneficiaries. We realize, however, that HCFA’s power to lower drug prices through 

the use of its inherent reasonableness authority was recently limited by a provision of the 

Medicare, Medicaid, and SCHIP Balanced Budget Refinement Act of 1999. In past 

reports, we recommended a number of other options for lowering albuterol payments. 

These recommendations included (1) greater discounting of AWPs, (2) basing payments 

on supplier acquisition costs, (3) establishing manufacturers’ rebates, and (4) using 

competitive bidding. We continue to strongly believe that action needs to be taken to 

lower unreasonable drug reimbursement amounts. 

Agency Comments 

The HCFA concurred with our recommendation, noting that basing reimbursement on 

acquisition cost is probably the best way to ensure that Medicare pays fair prices for 

covered drugs. Additionally, HCFA gave a detailed account of their numerous attempts 

to lower unreasonable drug reimbursement amounts in the Medicare program. Currently, 

HCFA plans to utilize a number of more accurate drug prices developed by First 

Databank, publisher of a pricing compendium used by the pharmaceutical industry. HCFA 

requested that Medicare contractors use these prices when calculating their drug 

reimbursement amounts. The HCFA also commented that they are working to develop a 

Medicare Reimbursement of Albuterol 12 OEI-03-00-00311 
comprehensive electronic file on the pricing of Medicare covered drugs, and are 

continuing a competitive bidding demonstration project for albuterol in Texas. In 

addition, HCFA is consulting with the Department of Justice and the Office of Inspector 

General on the feasibility of developing additional means to ensure that accurate drug 

pricing data is used in setting Medicare reimbursement rates. The full text of HCFA’s 

comments is presented in Appendix E. 

OIG Response 

We commend HCFA’s efforts to lower Medicare drug reimbursement rates. We fully 

support attempts to obtain more accurate prices for the Medicare program. We believe 

that HCFA’s request that Medicare contractors use the more accurate prices supplied by 

First Databank is a significant first step towards reimbursing drugs in a more appropriate 

manner. 

Medicare Reimbursement of Albuterol 13 OEI-03-00-00311 
APPENDIX A 

Previous OIG Reports on Albuterol Reimbursement

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

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

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

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

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

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

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

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

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

70 percent lower than Medicare’s reimbursement amount for the drug.

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

that Medicare’s allowances for albuterol sulfate substantially exceeded suppliers’ acquisition costs

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

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

on average supplier invoice costs. 

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

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

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

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

Medicare Reimbursement of Albuterol 14 OEI-03-00-00311 
APPENDIX B 

Calculation of Potential Savings for Albuterol

(1) To determine percentage differences in albuterol prices, we subtracted the source price 

from the Medicare price. We then divided this number by the Medicare price. 

(2) To calculate potential savings, we multiplied Medicare’s 1999 allowed charges for 

albuterol by the percentage difference in price. 

Price Source Price 

per mg 

Price 

Medicare 

per mg 

Difference 

Percentage 

in Price* 

Medicare 

Allowed 

1999 

Charges 

Medicare and 

Beneficiary 

Potential 

Savings 

VA Median Cost $0.07 $0.47 85.1% $246,136,877 $209,478,193 

Medicaid Upper Limit Amount $0.24 $0.47 48.9% $246,136,877 $120,449,961 

Chain Pharmacy Median Price $0.38 $0.47 19.1% $246,136,877 $47,132,593 

Internet Pharmacy Median Price $0.25 $0.47 46.8% $246,136,877 $115,213,006 

* Percentage rounded to nearest tenth 

Medicare Reimbursement of Albuterol 15 OEI-03-00-00311 
APPENDIX C 

Albuterol Prices Available at Chain Pharmacies

City Pharmacy (75ml) 

Price of 1 Box 

per mg Price 

1 Box 

(300 ml) 

Price of 4 Boxes 

per mg Price 

4 Box 

Atlanta CVS $22.99 $0.37 $91.99 $0.37 

Atlanta Drug Emporium $28.95 $0.46 $102.95 $0.41 

Atlanta Walmart $20.54 $0.33 $52.68 $0.21 

Boston CVS $29.29 $0.47 $117.99 $0.47 

Boston K Mart $27.99 $0.45 $86.59 $0.35 

Boston Walgreens $26.99 $0.43 $106.89 $0.43 

Chicago K Mart $21.99 $0.35 $80.59 $0.32 

Chicago Osco $27.69 $0.44 $110.76 $0.44 

Chicago Walgreens $28.19 $0.45 $112.76 $0.45 

Dallas Drug Emporium $15.44 $0.25 $35.94 $0.14 

Dallas Walgreens $23.89 $0.38 $94.99 $0.38 

Dallas Walmart $21.54 $0.34 $52.68 $0.21 

Kansas City K Mart $27.99* $0.37 $99.19* $0.33 

Kansas City Walgreens $23.99 $0.38 $95.79 $0.38 

Kansas City Walmart $21.54 $0.34 $52.98 $0.21 

New York CVS $22.99 $0.37 $91.99 $0.37 

New York K Mart $26.89* $0.36 $98.00* $0.33 

New York Walgreens $27.39 $0.44 $108.69 $0.43 

Philadelphia Drug Emporium $28.95 $0.46 $102.95 $0.41 

Philadelphia Walgreens $26.99 $0.43 $107.96 $0.43 

Philadelphia Walmart $20.54 $0.33 $52.68 $0.21 

San Francisco Rite Aid $21.98 $0.35 $57.69 $0.23 

San Francisco Safeway $26.99 $0.43 $81.49 $0.33 

San Francisco Walgreens $29.89 $0.48 $117.49 $0.47 

* Price of product is for box of 90 ml rather than 75 ml. 

Medicare Reimbursement of Albuterol 16 OEI-03-00-00311
APPENDIX D 

Albuterol Prices Available at Internet Pharmacies

Pharmacy (75 ml) 

Price of 1 Box 

per mg Price 

1 Box 

(300 ml) 

Price of 4 Boxes 

per mg Price 

4 Box 

Drugstore.com $15.78 $0.25 $62.50 $0.25 

Pharmor.com $19.29 $0.31 $76.89 $0.31 

Planetrx.com $13.23 $0.21 $41.94 $0.17 

Medicare Reimbursement of Albuterol 17 OEI-03-00-00311 
APPENDIX E 

Health Care Financing Administration Comments

In this appendix, we present, in full, comments from the Health Care Financing 

Administration. 

Medicare Reimbursement of Albuterol 18 OEI-03-00-00311 
APPENDIX E 

Medicare Reimbursement of Albuterol 19 OEI-03-00-00311 
APPENDIX E 

Medicare Reimbursement of Albuterol 20 OEI-03-00-00311 
APPENDIX E 

Medicare Reimbursement of Albuterol 21 OEI-03-00-00311 
APPENDIX E 

Medicare Reimbursement of Albuterol 22 OEI-03-00-00311 
Medicare Reimbursement of Albuterol 23 OEI-03-00-00311