Department of Health and Human Sefices 

OFFICE OF 

INSPECTOR GENERAL 

MEDICARE PAYMENTS 

FOR NEBULIZER DRUGS 

I 
OFFICE OF INSPECTOR GENERAL 

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

amended, is to protect the integrity of the Department of Health and Human Services’ (HHS) 

programs as well as the health and welfare of beneficiaries served by those programs. This 

statutory mission is carried out through a nationwide network of audits, investigations, and 

inspections conducted by three OIG operating components: the Office of Audit Services, the 

Office of Investigations, and the Office of Evaluation and Inspections. The OIG also informs 

the Secretary of HHS of program and management problems and recommends courses to 

correct them. 

OFFICE OF AUDIT SERVICES 

The OIGS Office of Audit Services (OAS) provides all auditing services for HHS, either by 

conducting audits with its own audit resources or by overseeing audit work done by others. 

Audits examine the performance of HHS programs and/or its grantees and contractors in 

carrying out their respective responsibilities and are intended to provide independent 

assessments of HHS programs and operations in order to reduce waste, abuse, and 

mismanagement and to promote economy and efficiency throughout the Department. 

OFFICE OF INVESTIGATIONS 

The OIGS Office of Investigations (01) conducts criminal, civil, and administrative 

investigations of allegations of wrongdoing in HHS programs or to HHS beneficiaries and of 

unjust enrichment by providers. The investigative efforts of 01 lead to criminal convictions, 

administrative sanctions, or civil money penalties. The 01 also oversees State Medicaid fraud 

control units which investigate and prosecute fraud and patient abuse in the Medicaid program. 

OFFICE OF EVALUATION AND INSPECTIONS 

The OIGS Office of Evaluation and Inspections (OEI) conducts short-term management and 

program evaluations (called inspections) that focus on issues of concern to the Department, 

the Congress, and the public. The findings and recommendations contained in these inspection 

reports generate rapid, accurate, and up-to-date information on the efficiency, vulnerability, 

and effectiveness of departmental programs. 

This report was prepared in the Philadelphia Regional Office, under the direction of Thomas 

J. Robertson, Regional Inspector General for Audit Services, and Robert A Vito, Regional 

Inspector General for Evaluation and Inspections. Project Staff included: 

Philadelphia Region Headquarters 

David Graf, Project Leade~ OAS Mary Beth Clarke, B-ogramAnaZyst 

Robert A. Katz, ProgramAnalyst 

Cynthia R. Hansford, ProgramAssistant 

Neil Montavani, Intern 
Depafiment of Health and Human Sefices 

OFFICE OF 

INSPECTOR GENEML 

MEDICARE PAYMENTS


FOR NEBULIZER DRUGS


& $$SERVICE$ 

~a+ 

+ 

~ 

s

% 

~w 

%+ $

‘%’d~a >

JUNE GIBBS BROWN 

Inspector General 

FEBRUf=Y 1996 

oEI-03-94-00390 
EXECUTIVE SUMMARY


PURPOSE 

This report examines differences in the reimbursement methodologies used by the 

Medicare and Medicaid programs to pay for prescription drugs, focusing on three 

inhalation drugs used in nebulizers. 

BACKGROUND 

Medicare does not generally pay for outpatient prescription drugs. However, there 

are several exceptions to this general rule, including payment for drugs used in 

conjunction with medical equipment. For such drugs, Medicare computes an allowed 

amount based on the lower of the Estimated Acquisition Cost (EAC) or the national 

Average Wholesale Price (AWP). The allowed amount is the price that Medicare and 

its beneficiaries pay a drug supplier. If a drug has multiple sources, price is based on 

the lower of the EAC or the median of the national AWP for all generic sources. 

The Medicaid program provides coverage for outpatient prescription drugs as an 

optional benefit. Currently, all States provide coverage for outpatient prescription 

drugs. Medicaid payment policies for such drugs vary across States, within guidelines 

established by the Health Care Financing Administration (HCFA). Many States 

discount the AWP to set drug prices. The Medicaid program, in addition, uses a 

rebate program to obtain discounts from pharmaceutical manufacturers. 

In this report, we compare Medicare and Medicaid costs in 17 States for three drugs 

used in conjunction with nebulizers by Medicare beneficiaries from January 1994 

through February 1995. A nebulizer is a medical device which administers drugs for 

inhalation therapy for patients with respiratory conditions such as asthma or 

emphysema. Medicare allowed amounts (which include 20 percent copayments by 

beneficiaries) for nebulizer drugs remained relatively stable between 1990 and 1992, 

never exceeding $74 million. Allowed amounts increased to $170 million in 1993 and 

$226 million in 1994, more than a 200 percent increase from 1990. 

FINDINGS 

l@&kare and b ben#iciaries paid about $37 millibn more for three nebulimrdregsin 17 

Statesthanthe amount thatMedicaidwouklhavepaidfor equivalentdiugs. 

We found that over $11.7 million of the higher costs are attributable to the 

method Medicare employs to determine prices paid to drug suppliers, and 

about $25.3 million is due to the lack of a manufacturers’ rebate program, 

similar to Medicaid’s. 

i 
PotentialMedicaresavingsarenot restited to the threenebulizerdrugsand 17 States 

reviewed 

Because of inherent differences in the reimbursement methodologies followed


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


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


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


methodology and implemented a manufacturers’ rebate program, it and its


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


nebulizer drugs (excluding administrative costs) in 1994.


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


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


for these drugs had Medicare’s drug pricing methodology been revised.


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


savings could have increased even more substantially.


RECOMMENDATIONS 

We recommend that HCFA reexamine its Medicare drug reimbursement 

methodologieswith a goal of reducing payments as appropriate. 

Our study demonstrated that Medicare could have saved millions by discounting the


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


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


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


Medicaid and other payers in obtaining competitive pricing for prescription drugs.


Discounted Wholesale Price


Many State agencies use a discounted AWP to establish drug prices. Medicare should


have a similar option. Medicare could base its drug payment on the lower of a


discounted AWP or the median of the AWP for all generic sources, whichever results


in the lower cost to Medicare and its beneficiaries. To implement this


recommendation, HCFA would have to revise Medicare’s claims coding system which


does not identify the manufacturer or indicate if the drug is a brand name or a generic


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


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


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


name or a generic equivalent.


Manufacturers’ Rebates


Medicare could develop a legislative proposal to establish a mandated manufacturers’


rebate program similar to Medicaid’s rebate program. We recognize that HCFA does


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


11 
similar to the program used in Medicaid. Legislation was required to establish the 

Medicaid rebate program, and would also be required to establish a Medicare rebate 

program. We have not thoroughly assessed how a Medicare rebate program might 

operate, what administrative complexities it might pose, or how a Medicare rebate 

program might differ from a Medicaid rebate program. We believe, however, the 

legislative effort would be worthwhile. The same manufacturers that provide rebates 

to Medicaid make the drugs that are used by Medicare beneficiaries and paid for by 

the Medicare program. 

Com~etitive Bidding 

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

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

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

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

pharmacies to compete for business to provide Medicare beneficiaries with 

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

including independents, chains, and mail-order pharmacies. 

Inherent Reasonableness 

Since Medicare’s 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 Secretary’s authority to reduce inherently unreasonable payment 

levels is streamlined. The current inherent reasonableness process is resource 

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

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

reduced drug prices cannot be placed into effect quickly. 

Acquisition Cost 

Medicare could base the payment of drugs on the EAC. The Durable Medical 

Equipment Regional Carriers (DMERCS) currently have this option; however, HCFA 

has been unsuccessful in gathering the necessary data to fully implement it. Once the 

problem of gathering the necessary data is overcome, the use of the EAC would result 

in lower allowed amounts. 

Our work regarding drugs reimbursed by Medicare is continuing. We will explore 

reasons for the sharp increase in reimbursement for nebulizer drugs that occurred in 

1993 and 1994. We will also determine the actual prices drug suppliers pay for 

nebulizer drugs. Finally, we will examine other drugs Medicare reimburses to ensure 

that they are properly priced, and to validate our premise that the differences inherent 

in the reimbursement methodologies of Medicare and Medicaid cause Medicare to 

pay more for drugs than Medicaid, regardless of the type of drug or where Medicare 

beneficiaries reside, 

111 
AGENCY COMMENTS 

The HCFA concurred with our recommendation and is currently examining available 

options in an effort to make appropriate drug payment reductions. The HCFA 

expects by early 1996 to reach a decision on whether to proceed with a legislative 

proposal or to revise current regulations. The full text of HCFA’S comments can be 

found in Appendix B. 

iv 
TABLE OF CONTENTS


PAGE 

EXE~ S~Y 

. . . . . . 1


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


. . . . . . ..”” . . 6


~INGS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .


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


Pricing Method . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
 9


Manufacturers’ Rebate Program . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
 . . . . . . 9


�Additional SatingsPossible . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .


..11


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


. A-1


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


. B-1


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


6 
INTRODUCTION


PURPOSE 

This report examines differences in the reimbursement methodologies used by the 

Medicare and Medicaid programs topay for prescription drugs, focusing onthree 

inhalation drugs usedin nebulizers. 

BACKGROUND 

Anebulizeris atype of durable medical equipment (DME) through which 

prescription drugs areadministered for inhalation therapy. Itconsists essentially of 

two components: (1) a power source such as an air compressor or ultrasonic device, 

and (2) a dispensing mechanism consisting of flexible tubing, a mouthpiece, and liquid 

reservoir. Patients with respirato~ conditions such as asthma or emphysema may 

require treatment that involves the use of a nebulizer. The nebulizer is used by 

placing an inhalation prescription drug into its reservoir which is then converted into a 

fine spray by the power source and inhaled by the user. 

Medicaretiogram 

Title XVIII of the Social Security Act authorizes coverage of DME under Medicare


Part B. Section 2100.5 of the Medicare Carriers Manual specifies instances involving


covered uses of outpatient prescription drugs, The Manual specifies that drugs are


covered under Medicare Part B as long as the drugs are necessary for the effective use


of the DME.


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


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


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


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


carriers which had previously processed DME claims. The geographical areas


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


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


Medicare guidelines. The four DMERCS are:


.	 MetraHealth in Wilkes-Barre, Pennsylvania (hereafter referred to as DMERC 

A). This DMERC processes claims for nebulizer drugs for Medicare 

beneficiaries residing in 10 States. 

.	 AdminaStar Federal Inc. in Indianapolis, Indiana (hereafter referred to as 

DMERC B). This DMERC processes claims for Medicare beneficiaries in nine 

States and the District of Columbia. 

1

.	 Palmetto Government Benefits Administrators in Columbia, South Carolina 

(hereafter referred to as DMERC C). This DMERC processes claims for 

Medicare beneficiaries in 14 States, Puerto Rico, and the Virgin Islands. 

*	 Connecticut General Life in Nashville, Tennessee (hereafter referred to as 

DMERC D). This DMERC processes claims for Medicare beneficiaries in 17 

States and three territories. 

According to42 Code of Federal Regulations 405.517, Medicare prices drugs based on


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


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


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


nebulizer drugs included in this review), the price is based on the lower of the EAC or


the median of the national AWP for all generic sources. The EAC is determined


based on surveys of the actual invoice prices paid for the drug. The AWP is


determined through The Red Book or similar price listings used in the pharmaceutical


industry.


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


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


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


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


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


was used.


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


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


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


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


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


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


about $269 million.


Medicaidl?ogram 

State Medicaid agencies generally reimburse drug suppliers per prescription with the 

amount of reimbursement varying by drug. Each State agency has the authority to 

develop its own reimbursement formula for prescription drugs, including recipient 

copayments, subject to upper payment limits established by HCFA. For the drugs that 

1 The allowed amount represents the total amount of the payment for the drug. Medicare 

pays 80 percent of the allowed amount and the beneficiaries pay the remaining 20 percent. 

2 
we reviewed, the State Medicaid Manual, Section 6305.1 B states that payments for 

drugs must not exceed, in the aggregate, prices determined by applying the lower of 

the EAC, plus a reasonable dispensing fee, or the provider’s usual and customary 

charges to the public. Many States also use a discounted AWP to set drug prices. 

Drug suppliers bill prescription drugs to the State Medicaid agency using a national 

drug code (NDC). The NDC identifies the firm that manufactures or distributes the 

drug along with the drug’s characteristics. The NDC also indicates if a drug is a brand 

name or a generic equivalent. Thus, unlike a State Medicaid agency, a DMERC 

cannot differentiate between brand and generic drugs. 

With the enactment of the Omnibus Budget Reconciliation Act of 1990 (OBRA 90), 

Public Law 101-508, enacted November 5, 1990, pharmaceutical manufacturers are 

required to enter into and have rebate agreements in effect with all State Medicaid 

agencies for drugs dispensed to Medicaid recipients. Manufacturers must have a 

completed rebate agreement in effect for their products to be eligible for inclusion in 

the Medicaid program. For CY 1994, quarterly rebates for innovator multiple source 

drugs (that is, brand name drugs) were based on the greater of 15.4 percent of 

Average Manufacturer Price (AMP)2 or the difference between the AMP and Best 

Price.3 For non-innovator (generic) multiple source drugs, the rebate was 11 percent 

for CY 1994. The Medicare program does not use rebate agreements to reduce the 

cost of covered drugs dispensed to Medicare beneficiaries. 

ReliuedWork by the Of&e of InspectorGeneral 

We recently issued a report entitled, Medicare Part B--Reimbursement To Providers For 

Drugs Used In Conjunction Wi~hDurable Medical Equipment (CIN-A-06-92-00079). In 

this study, we found that HCFA lacked clear legislative authority to cover selfadministered outpatient prescription drugs. Additionally, we concluded there was no 

assurance that substantial amounts of drugs were properly priced and paid because 

HCFA did not require carriers to obtain detailed pricing information. We 

recommended HCFA seek legislation to expressly authorize the coverage of drugs 

used with DME and implement policies and procedures to ensure that carriers 

properly price and pay prescription drugs. 

METHODO~GY AND SCOPE 

Our objectives for this review were to identify differences in the reimbursement 

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

2 AMP is the average price paid by wholesalers for products distributed to the retail class 

or trade. 

3 Best Price is the lowest price paid by any purchaser (exclusive of depot prices and singleaward contract prices as defined by any Federal agency) and includes products with special 

packaging, labeling, or identifiers. 

3 
drugs, and to estimate the additional costs incurred by the Medicare program and its 

beneficiaries forthree selected nebulizer drugs. Ourreview includes Medicare and 

Medicaid payments for nebulizer drugs for the period January 1,1994 through 

February 28, 1995. 

We reviewed HCFAS policies and procedures concerning Medicare and Medicaid 

reimbursement for drugs. We obtained the Medicare information we needed to 

achieve our objectives from HCFA’S National Claims History (NCH) One Percent 

Sample file and the DMERCS responsible for processing nebulizer drug claims. Using 

the NCH, we obtained drug claims for 20 “J” codes used for nebulizer drugs. We 

grouped the claims by “J” code and by the State of beneficiary residence. We then 

selected the three nebulizer drugs with the highest allowed amounts: (1) Albuterol 

Sulfate, 0.083%, hereafter referred to as Albuterol Sulfate; (2) Metaproterenol Sulfate, 

0.4%; and (3) Metaproterenol Sulfate, 0.6%. Projecting the allowed amounts obtained 

from the NCH to the universe of nebulizer drugs, we determined that the three 

selected drugs totaled about $211.7 million, or about 79 percent of the $269 million 

allowed for all nebulizer drugs. Albuterol Sulfate accounted for $182.3 million of the 

allowed amounts. 

We then selected 17 States4 (based on the beneficiaries’ States of residence) with the 

highest allowed amounts for nebulizer drugs, and grouped these States under their 

servicing DMERC, as shown below: 

STATES AND SERVKXNG DMERCs INCLUDED IN REVIEW 

I DMERC A DMERC B DMERC C DMERC D 

I I ) I 1 

New	 York Illinois Alabama Louisiana California 1 

Pennsylvania \ Michigan I Arkansas 

I 

Mississippi 1

Missouri I 

Ohio Florida North Carolina Washington 

Georgia Texas 

I I Kentuc@ 

4 Puerto Rico, Tennessee, and Arizona were originally included in the top States 

for review. However, reimbursement information was not available for Puerto Rico 

from HCFA’S Medicaid Drug Rebate Initiative (MDRI) system, and Arizona and 

Tennessee’s Medicaid programs are operated by several managed care programs. The 

MDRI system assists HCFA in monitoring the manufacturers’ rebate program. The 

system calculates rebate amounts for individual drugs, and transmits these amounts to 

the Medicaid agencies for use in invoicing drug manufacturers. Each managed care 

program operates independently and sets their own fees and payments. Therefore, 

Puerto Rico, Tennessee, and Arizona were excluded from our review. 

4 
We projected that the Medicare beneficiaries in the 17 selected States accounted for 

about $146.9 million or about 69 percent of the $211.7 million in allowed amounts for 

the three nebulizer drugs from January 1, 1994 through February 28, 1995. We 

obtained actual allowed prices per milliliter (ml) for the three selected nebulizer drugs 

throughout the period of our review from the DMERCS. We used these prices, which 

include the beneficiary copayments, in our comparisons to Medicaid. 

We obtained the Medicaid information we needed to achieve our objectives from the 

MDRI system, and from contacts with the 17 State Medicaid agencies concerning their 

dispensing fees and recipient copayment amounts. We factored the dispensing fees 

and copayment amounts into our computations of the Medicaid price per ml. For 

information on how we compared the costs of the three selected nebulizer drugs for 

the Medicare and Medicaid programs, see Appendix A. 

This review is part of Operation Restore Trust, an initiative combining the forces of 

multiple agencies to combat Medicare and Medicaid fraud, waste, and abuse in 

California, Florida, Illinois, New York, and Texas. Together, these States account for 

40 percent of the nation’s Medicare and Medicaid beneficiaries. 

This inspection was conducted in accordance with the Quality Standards for Inspections 

issued by the President’s Council on Integrity and Efficiency. 

5

FINDINGS


MEDICARE AND ITS BENEFICIARIES PAID ABOUT $37 MILLION MORE 

FOR THREE NEBULIZER DRUGS IN 17 STATES THAN THE AMOUNT 

MEDICAID WOULD HAVE PAID FOR EQUIVALENT DRUGS. 

During the period under review, January 1, 1994 through February 28, 1995, Medicare 

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

than the amount Medicaid would have paid for equivalent drugs. 

Two significant differences in the drug reimbursement methodologies used by the 

Medicare and Medicaid programs caused Medicare and its beneficiaries to pay more 

for the nebulizer drugs. One, Medicare allowed a higher price to drug suppliers for 

two of the three drugs reviewed because of the manner in which it used the AWP to 

determine the drug price. This resulted in increased costs to the Medicare program of 

over $11.7 million. Because Medicare beneficiaries are required to make a copayment 

of 20 percent for selvices received under Medicare, beneficiaries also had to absorb a 

portion of the higher drug prices. Second, Medicare does not have a manufacturers’ 

rebate program similar to Medicaid’s. This resulted in increased costs to the Medicare 

program OFabout $25.3 million. The following table illustrates the higher costs of the 

three nebulizer drugs to the Medicare program resulting from differences in the drug 

reimbursement methodologies. 

Higher Cost of Medicare Drugs Due To: 

Nebulizer Drugs 

Reviewed Higher Prices Paid Lack of Manufacturers’ Total 

to Drug Suppliers Rebate Program 

Albuterol Sulfate $11,265,556 $22,870,051 $34,135,607 

Metaproterenol Sulfate (6,341) 1,614,042 1,607,701 

0.4% 

Metaproterenol Sulfate 447,731 816,856 1,264,587 

0.6% 

Totals $11,706,946 $25,300,949 $37,007,895 

Percentage 32% 68% 100% 

6

Nebulizer drug reimbursementscould be reduced by allowingDMERCS the option of 

basing prices on the lower of either a discountedAWP for the drug dispensedor the 

median of the AWP for all generic sources. 

Medicare and its beneficiaries paid drug suppliers over $11.7 million more than the 

amount that Medicaid would have paid for equivalent drugs. The higher payments to 

the drug suppliers were caused by Medicare using the median of the national AWP for 

all generic sources versus Medicaid’s method of discounting the AWP. 

The State Medicaid Manual, Section 6305.1 B states that payments for drugs must not 

exceed, in the aggregate, payment levels determined by applying the lower of the 

EAC, plus a reasonable dispensing fee, or the provider’s usual and customary charges 

to the public. The Manual further states that in the past many States based the EAC 

upon the AWP, but that a number of studies have shown that: 

“...there is a preponderance of evidence that demonstrates that such A WP 

levels overstate the prices that pharmacists actually pay for drug products by 

as much as 10-20 percent because they do not reflect dkcounts, premiums, 

special offe~ or incentives, etc. Consequently, wi~hout valid documentation 

to the contrary, a published A WP level as a State determination of EAC 

without a significant discount being applied k not an acceptable estimate of 

prices generallv and current~ paid by providers. ” 

In general, the four DMERCS developed Medicare drug prices using the median AWP 

for the generic drug equivalent of the drugs being purchased. Thirteen of 17 State 

Medicaid agencies discounted the AWP an average of 9.6 percent in pricing drugs as 

suggested by the State Medicaid Manual. Two other State agencies used the 

Wholesale Acquisition Cost (WAC) plus a percentage of the WAC as the basis for 

pricing drugs. Only two State Medicaid agencies based drug prices on the AWP. 

These differences in computing drug prices resulted in Medicare and its beneficiaries 

paying over $11.7 million more than the 17 State Medicaid agencies included in our 

review, as shown on the following page. 

7

I DMERCS 

ebulizer Drugs A B c D Total 

Reviewed 

Albuterol ($115,086) $1,627,822 $8,929,695 $823,125 $11,265,556 

Sulfate 

Metaproterenol (23,595) $ 6,750 $ 10,504 0 (6,341) 

Sulfate, 0.4% 

Metaproterenol (90,432) $ 41,887 $ 419,539 $76,737 447,731 

Sulfate, 

0.6% 

Totals I ($229,113)1 $1,676,454 $9,359,7381 $899,8621 $ll,706,94~\ 

The above table shows that pricing drugs in amanner similar to the 17 State Medicaid


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


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


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


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


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


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


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


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


national AWP for all generic sources).


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


drug suppliers does not always result in a lower price than Medicare’s current method


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


optimum approach to revising Medicare’s pricing methodology would allow DMERCS


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


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


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


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


8


1 
The cost of nebulizer drugs to the Medicare program could be further reduced by 

establishinga manufacturers’rebate program similarto Medicaid%. 

The lack of a manufacturers’ rebate program caused Medicare to pay about $25.3 

million more for the three drugs than the amount that Medicaid would have paid for 

equivalent drugs. 

We reviewed data contained in the MDRI system for the 17 State Medicaid agencies 

included in our review. This data is grouped by manufacturer and product code and 

includes information on the rebate amount per unit, total units dispensed, and total 

rebate amounts claimed. Using this data, we were able to determine the amount of 

the rebate per ml that each State agency received for the three nebulizer drugs 

reviewed. We applied the rebate amount to the number of mls paid for by Medicare. 

As shown below, all four DMERCS would have reduced their drug costs had a 

manufacturers’ rebate program been in effect for Medicare. 

Nebulizer Drugs LReviewed

Albuterol Sulfate


Metaproterenol


Sulfate, 0.4%


Metaproterenol


Sulfate,


0.6%


Totals


DMERCS


D 

$5,004,160 

27 

125,603 

$5,129,790 

Total 

$22,870,051 

1,614,042 

816,856 

$25,300,949 

A B 

$1,899,860 $4,060,684 

78,650 8,250 

199,426 79,300 

$2,177,936 $4,148,234 

c 

$11,905,347 

1,527,115 

412,527 

$13,844,989 

POTENTIAL MEDICARE SAVINGS ARE NOT RESTRICTED TO THE THREE 

NEBULIZER DRUGS AND 17 STATES REVIEWED. 

This review showed that Medicare and its beneficiaries paid a net of about $37 million 

more for three nebulizer drugs than the amount that the 17 State Medicaid agencies 

would have paid for equivalent drugs because of the manner in which Medicare priced 

drugs and the absence of a manufacturers’ rebate program. Because these NO 

differences are inherent in the reimbursement methodologies followed by Medicare 

and Medicaid, the potential cost savings available to Medicare are not, in our opinion, 

restricted to the three drugs or the 17 States included in our review. 

9 
For example, 26 State Medicaid agencies not in our review reported that they discount 

the AWP an average of about 9 percent in determining drug prices. Only three State 

agencies not in our review reported using the AWP as the basis for determining drug 

prices. Thus, allowing DMERCS the option of using a discounted AWP like their 

State Medicaid agency counterparts could result in cost savings in many of the 26 

States that base prices on a discounted AWP. 

As noted earlier, Medicare allowed about $226 million for the 20 nebulizer drugs in 

1994. If Medicare had revised its drug pricing methodology and implemented a 

manufacturers’ rebate program, about $58 million of the $226 million allowed for 

nebulizer drugs (excluding administrative costs) in 1994 could have been saved. 

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

Medicare and its beneficiaries could have saved about $83 million had Medicare’s drug 

pricing methodology been revised. Furthermore, had there been a drug rebate 

program in effect, the estimated savings could have increased even more substantially. 

10

RECOMMENDATIONS


We recommend that HCFA reexamine its Medicare drug reimbursement 

methodologieswith a goal of reducing payments as appropriate. 

Our report demonstrates that Medicare could have saved millions by discounting the


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


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


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


Medicaid and other payers in obtaining competitive pricing for prescription drugs.


Discounted Wholesale Price


Many State agencies use a discounted AWP to establish drug prices. Medicare should


have a similar option. Medicare could base its drug payment on the lower of a


discounted AWP or the median of the AWP for all generic sources, whichever results


in the lower cost to Medicare and its beneficiaries. To implement this


recommendation, HCFA would have to revise Medicare’s claims coding system which


does not identify the manufacturer or indicate if the drug is a brand name or a generic


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


specific drug. Medicaid uses the NDC in processing drug claims. The NDC identifies


the manufacturer and reflects whether the drug is a brand name or a generic


equivalent.


Manufacturers’ Rebates


Medicare could develop a legislative proposal to establish a mandated manufacturers’


rebate program similar to Medicaid’s rebate program. We recognize that HCFA does


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


similar to the program used in Medicaid. Legislation was required to establish the


Medicaid rebate program, and would also be required to establish a Medicare rebate


program. We have not thoroughly assessed how a Medicare rebate program might


operate, what administrative complexities it might pose, or how a Medicare rebate


program might differ from a Medicaid rebate program. We believe, however, the


legislative effort would be worthwhile. The same manufacturers that provide rebates


to Medicaid make the drugs that are used by Medicare beneficiaries and paid for by


the Medicare program.


Competitive Bidding


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


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


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


11 
in many instances, including the procurement of drugs. Medicare could ask 

pharmacies to compete for business to provide Medicare beneficiaries with 

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

including independents, chains, and mail-order pharmacies. 

Inherent Reasonableness 

Since Medicare’s 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 Secretary’s authority to reduce inherently unreasonable payment 

levels is streamlined. The current inherent reasonableness process is resource 

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

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

reduced drug prices cannot be placed into effect quickly. 

Accwisition Cost 

Medicare could base the payment of drugs on the EAC. The DMERCS currently 

have this option; however, HCFA has been unsuccessful in gathering the necessary 

data to fully implement it. Once the problem of gathering the necessary data is 

overcome, the use of the EAC would result in lower allowed amounts. 

AGENCY COMMENTS 

The HCFA concurred with our recommendation and is currently examining available 

options in an effort to make appropriate drug payment reductions. The HCFA 

expects by early 1996 to reach a decision on whether to proceed with a legislative 

proposal or to revise current regulations. The full text of HCFAS comments maybe 

found in Appendix B. 

12

APPENDIX A


COST COMPARISON NOTES 

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


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


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


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


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


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


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


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


program had been in effect.


We used HCFA’S NCH to select the three drugs paid by Medicare, and the 17 States


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


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


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


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


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


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


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


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


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


comparisons.


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


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


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


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


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


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


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


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


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


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


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


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


nebulizer drugs.


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


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


below.


A-1

1.	 We recorded the total reimbursable amount paid to drug suppliers by a State 

agency for a NDC as shown on the MDRI system. 

2. We subtracted from the total reimbursable amount the total dispensing fees 

paid to the drug suppliers. We computed the total dispensing fees by 

multiplying the number of prescriptions per NDC as shown on the MDRI 

system by the State Medicaid agency’s dispensing fee per prescription. This 

step was needed to separate the cost of the drug from the professional 

dispensing fee, both of which were lumped together in the State agency 

payment to the drug supplier. 

3.	 We added to the total reimbursable amount the total copayments that were the 

responsibility of the Medicaid recipients. We computed this total by multiplying 

the number of prescriptions as shown on the MDRI system by the copayment 

amount provided by each State agency. This step was necessary to arrive at 

total reimbursable amounts paid to drug suppliers by both the State agencies 

and the recipients who shared in the payments. 

4.	 We divided total reimbursable amounts paid to drug suppliers as computed 

above by the total mls dispensed as shown on the MDRI system to arrive at the 

price paid to drug suppliers per ml. We consider this the total price of the 

drug per ml paid to the drug supplier by a State Medicaid agency. 

We then applied the difference between the Medicare price per ml paid by the four 

DMERCS and the Medicaid price per ml paid by the 17 State Medicaid agencies to 

the volume of drugs reimbursed by Medicare, per the NCH. The comparison showed 

that Medicare paid over $11.7 million more than the amount that the 17 State 

Medicaid agencies would have paid. In making the above computations, we had 

pricing data for the entire 14-month period of our review for Medicare, but only 9 

months for Medicaid. We, therefore, compared the 9-month Medicaid data against 

Medicare data for both a 9-month and 14-month period, and used the most 

conservative results (that is, the lowest Medicare price regardless of the time period). 

The actual cost of a drug to the Medicaid program is lessened by quarterly rebates 

provided by drug manufacturers. To arrive at this cost to the Medicaid program, we 

subtracted from the total price per ml paid to drug suppliers by a State agency (as 

computed in step 4 above) the rebate amount per ml as shown in the MDRI system. 

We then compared this amount to the Medicare price per ml paid to drug suppliers to 

determine the total amount that Medicare paid in excess of the cost of the drugs to 

the Medicaid program after the rebate was factored in. 

We determined that the Medicare program and its beneficiaries paid about $37 

million more for the three nebulizer drugs than the amount that Medicaid would have 

paid for the drugs. This excess cost could have been avoided had: (1) the four 

A-2

Comments of the Health Care Financing Administration (HCFA’)on office of 

Insmctor General (01(3) Drafl ReDort “Me&care Pavrnents for Nebuliier Drum.” 

(oEI-03-94-oo390\ 

OIGRecommendation


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


payments as appropriate.


HCFA ResDonse


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


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


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


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


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


Discounted Wholesale Price


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


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


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


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


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


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


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


Manufacturers’ Rebates/Competitive Bidding


These options involve proposing legislation to mandate a “Manufacturers’ Rebate Program”


similar to Medicaid’s rebate program and to allow for “competitive bidding.” As part of the


Medicare drug benefit proposed in the Administration’s health care reform bill, we put forward


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


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


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


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


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


drugs.


Inherent Reasonableness


We agree that the Secretary’s authority to make “inherent reasonableness” payment changes for


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


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


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


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


regard, we believe that inherent reasonableness authority should be restored to Medicare’s

.

�,* ,Iwlc,, ~ 

‘* *+ Health Care Financing Administration � 

~ DEPARTMENTOFHEALTH& HUMANSERVICES :

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% 

‘+‘4.	

$

4.,,,0 The Administrator 

> Washington, D.C. 20201 

TO June GibbsBrown 

Inspector General 

FROM	 Bruce C. Vladec 

Administrator 

SUBJECT Office of Inspector General M lleporE ‘%ledicae Payments for 

Nebulizer Drugs,” (OEI-03-94-O0390) 

We reviewed the above-referenced report which examines the diHerences h tie 

refibwsement methodolo~es used by the Medicare and Me&ctid pr’ogr~s to pay for 

nebulizer drugs. Attached are our comments on the report recommen&tion. 

Thank you for the opportun.@ to review and comment on this draft repoti. 

Attachment 

10 

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DMERCsbeen able toadopt thesame drug pricing methods as their 17 State 

Medicaid agency counterparts, and (2) a manufacturers’ rebate program been in effect 

for Medicare. 

As shown in this report, however, although Medicaid’s pricing methods resulted in a 

net savings of over $11.7 million, there were instances where Medicare’s current 

method of pricing resulted in a lower price. This had the effect of lowering the 

potential savings to Medicare. Because of this we recommended that HCFA allow 

DMERCS the option of using Medicaid’s method of discounting the AWP or 

Medicare’s method of using the median of the national AWP for all generic sources, 

whichever results in the lower cost to Medicare and its beneficiaries. 

Had the DMERCS been allowed this option, they could have saved the Medicare 

program and its beneficiaries $12,136,321 on the price paid to drug suppliers. The 

increase is due to the fact that whenever the Medicaid price per ml was higher then 

Medicare’s price, we used Medicare’s price. This had the effect of increasing the cost 

savings available to Medicare by $429,375. Adding the cost savings attributed to the 

manufacturers’ rebate program, the total potential cost savings is $37,437,270. 

A-3

APPENDIX B 

B-1 
Page 2


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


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


AcquisitionCost


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


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


regulations. The SUIVeywss not approved by the office of Management and Budget. The sumey


was found to be too burdensome to pursue because of the large number of physicians and drugs


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


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