Department of Health and Human Services 

OFFICE OF 

INSPECTOR GENERAL 

JANET REHNQUIST 

Inspector General 

MARCH 

OEI-03-01-00410 

EXCESSIVE MEDICARE 

REIMBURSEMENT FOR ALBUTEROL 

2002 
OFFICE OF INSPECTOR GENERAL

http://www.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. 
EXECUTIVE SUMMARY 

PURPOSE 

This report compares the amount Medicare reimburses for albuterol to the prices available to 

the Department of Veterans Affairs (VA) and to acquisition costs for suppliers. 

BACKGROUND 

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

Medicare Part B will cover drugs that are necessary for the effective use of durable medical 

equipment. One such product, albuterol, is an inhalation drug commonly used with a nebulizer 

to treat patients suffering from asthma or emphysema. Medicare paid $296 million for 

albuterol in 2000. In general, Medicare reimburses a covered drug at 95 percent of the drug’s 

average wholesale price. Medicare payments include both the 80 percent that Medicare 

reimburses and the 20 percent coinsurance payment for which beneficiaries are responsible. 

Albuterol is usually provided to Medicare beneficiaries by suppliers, who then submit claims 

for reimbursement to Medicare. Suppliers can purchase drug products through group 

purchasing organizations, wholesalers, and directly from manufacturers. Unlike Medicare, the 

VA provides veterans with drugs purchased 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 compared Medicare’s current reimbursement amount for albuterol to amounts paid by the 

VA and to acquisition costs for suppliers and wholesalers. We obtained reimbursement 

amounts for albuterol from Medicare and acquisition costs from the VA. To obtain supplier 

and wholesaler acquisition costs, we collected prices from wholesale catalogs, supplier 

invoices, and Drug Topics Red Book. 

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i 
FINDINGS 

Medicare and its beneficiaries would save $264 million a year if albuterol were 

reimbursed at the median price paid by the VA 

The Medicare reimbursement amount for albuterol is more than nine times greater than the VA 

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

price of only $0.05 per milligram (mg), while Medicare reimburses at 

$0.47 per mg. We estimate that Medicare and its beneficiaries would save $264 million a 

year if reimbursement for albuterol were set at the median amount available to the VA. 

Medicare beneficiaries would receive $53 million of this savings through reduced coinsurance 

payments. Based on the Federal Supply Schedule, the VA’s median acquisition cost for 

albuterol has fallen by more than 50 percent over the last three years, from $0.11 per mg in 

1998 to $0.05 per mg in 2001. During the same time period, Medicare’s reimbursement 

amount has remained constant at $0.47 per mg. 

Medicare and its beneficiaries would save between $226 million and $245 million 

a year if albuterol were reimbursed at prices available to suppliers 

Medicare’s reimbursement amount for albuterol was nearly six times higher than the median 

catalog price. Like the VA, catalog prices for albuterol have fallen over the last several years, 

from $0.23 per mg in 1996 to its current median price of $0.08 per mg. We found that 

Medicare would save $245 million a year by basing albuterol reimbursement on the current 

median catalog price. In addition, we found that the median supplier invoice price was $0.09 

per mg, and the median wholesale acquisition cost reported by manufacturers was $0.11 per 

mg. If Medicare based albuterol reimbursement on these prices, the program and its 

beneficiaries would save between $226 million and $239 million a year. 

Less than one percent of albuterol suppliers were responsible for providing the 

majority of the product to Medicare beneficiaries in 2000 

Medicare reimbursed 6,522 suppliers for albuterol claims in 2000. However, just 34 of these 

suppliers received more than $1 million each in Medicare reimbursement for albuterol in 2000, 

with five having between $11 million and $35 million in paid claims. These 34 suppliers, who 

all provided home-delivery/mail-order services to beneficiaries, received 63 percent of the 

Medicare payments for albuterol in 2000. Therefore, the majority of the albuterol supplied to 

Medicare beneficiaries was provided by suppliers that purchase a large quantity of the 

Excessive Medicare Reimbursement for Albuterol 

OEI-03-01-00410 

ii 
product. We believe that suppliers that purchase albuterol in such large quantities may receive 

volume discounts from manufacturers and wholesalers. 

RECOMMENDATION 

Medicare should reduce excessive reimbursement amounts for albuterol 

Despite numerous attempts by the Centers for Medicare & Medicaid Services (CMS) to 

lower reimbursement amounts for prescription drugs, the findings of this report illustrate that 

Medicare still pays too much for albuterol. We have consistently found that the published 

average wholesale prices currently used by Medicare to establish reimbursement amounts bear 

little or no resemblance to actual wholesale prices that are available to suppliers and large 

government purchasers. 

We understand that unlike most drugs covered by Medicare, albuterol is usually provided by 

suppliers rather than administered by physicians. These suppliers obviously need to make a 

profit from the products they provide, yet the spread between what Medicare reimburses for 

albuterol and the price at which suppliers are able to purchase the drug is significant. 

Reimbursement levels for albuterol not only impact the Medicare program, but also affect 

Medicare beneficiaries who pay increased coinsurance amounts. 

We offer the following options for reducing excessive reimbursement amounts for covered 

drugs: 

< Authorizing a commission to set payment rates. 

< Calculating national estimated acquisition costs based upon the average manufacturer 

prices reported to the Medicaid program. 

< Collecting more accurate average wholesale prices from drug pricing catalogs or other 

sources. 

< Increasing the discount off the published average wholesale prices. 

< Basing payment on physician/supplier acquisition costs. 

Excessive Medicare Reimbursement for Albuterol 

OEI-03-01-00410 

iii 
< Establishing manufacturers’ rebates similar to those used in the Medicaid program. 

< Creating a fee schedule for covered drugs based on the Federal Supply Schedule. 

< Using CMS’ inherent reasonableness authority. 

< Using competitive bidding. 

Agency Comments 

The CMS agreed that the amounts being reimbursed for drugs in the Medicare program are 

excessive, and that it is clear that the payment system for outpatient drugs needs revision. The 

agency noted that it must find a way to ensure that the program pays appropriately for all 

Medicare benefits, including covered drugs and the services required to furnish those drugs. 

The CMS went on to state that they are looking forward to working with the Congress and the 

OIG to revise the Medicare payment system for prescription drugs. 

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iv 
TABLE OF CONTENTS 

PAGE

EXECUTIVE SUMMARY ..................................................... I

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

FINDINGS 

Department of Veterans Affairs Costs ......................................... 6

Supplier Acquisition Costs ................................................. 7

Suppliers Reimbursed by Medicare .......................................... 8

RECOMMENDATION ....................................................... 9

APPENDICES

A. Selected OIG Reports on Drug Reimbursement .............................. 11

B. Calculation of Potential Savings for Albuterol ................................ 12

C. Centers for Medicare & Medicaid Services Comments ........................ 13

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v 
INTRODUCTION 

PURPOSE 

This report compares the amount Medicare reimburses for albuterol to the prices available to 

the Department of Veterans Affairs (VA) and to acquisition costs for suppliers. 

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 that are necessary for the effective use of durable medical 

equipment. One such product, albuterol, is an inhalation drug commonly used with a nebulizer 

to treat patients suffering from asthma or emphysema. Albuterol is usually provided to 

beneficiaries by suppliers, who then submit claims for reimbursement to Medicare. Medicare 

paid $296 million for the unit dose form of albuterol in 2000. This total represents over 43 

percent of the $683 million Medicare paid for all inhalation drugs that year. Medicare 

payments include both the 80 percent that Medicare reimburses and the 20 percent 

coinsurance payment for which beneficiaries are responsible. 

Medicare Drug Reimbursement 

The Centers for Medicare & Medicaid Services (CMS), which administers the Medicare 

program, contracts with four durable medical equipment regional carriers to process all claims 

for durable medical equipment and associated supplies, including inhalation drugs. Each 

carrier is responsible for determining the reimbursement amount for inhalation drugs 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 carriers base their reimbursement amount for 

a covered drug on its average wholesale price as published in Drug Topics Red Book or 

similar pricing publications used by the pharmaceutical industry. If a drug is available only as a 

single brand-name product, reimbursement is calculated by taking 95 percent of the drug’s 

average wholesale price. For drugs like albuterol that have both brand and generic sources 

Excessive Medicare Reimbursement for Albuterol 

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1
available, reimbursement is based on 95 percent of the median average wholesale price for 

generic sources. However, if a brand-name product’s average wholesale price is lower than 

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

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2 
Recent Attempts to Lower Medicare Drug Reimbursement 

Section 4316 of the Balanced Budget Act of 1997 allows the Department of Health and 

Human Services to diverge from Medicare’s statutorily defined payment method if the method 

results in payment amounts which are not inherently reasonable. In late 1998, CMS regional 

carriers attempted to use this authority to lower what it considered excessive reimbursement 

for several items. One of these items was albuterol, which was targeted for an 11 percent fee 

reduction. However, the lower reimbursement amounts were never implemented as Congress 

suspended the use of inherent reasonableness through a provision of the Medicare, Medicaid, 

and SCHIP Balanced Budget Refinement Act of 1999. This provision required (1) the 

General Accounting Office (GAO) to complete a study on the potential effects of using 

inherent reasonableness measures, and (2) the Department of Health and Human Services to 

publish new inherent reasonableness regulations based on the findings of the GAO report. The 

GAO report, issued in July 2000, found that inherent reasonableness reductions for some 

items were justified; however, the GAO questioned the methodology the carriers used in their 

collection of pricing data for albuterol. The Department has not issued any new inherent 

reasonableness regulations since the publication of the GAO report. 

The CMS has also included albuterol and several other inhalation drugs in a competitive 

bidding project in the San Antonio, Texas area that uses market forces to set accurate prices 

for durable medical equipment and related supplies. In November 2000, CMS announced the 

selection of suppliers who had submitted competitive bids for the included items. New prices 

for these items went into effect on February 1, 2001. The new reimbursement amount for 

albuterol set by the competitive bidding process is approximately 32 percent below the usual 

Medicare price. The CMS hopes to use the results from these demonstrations more generally 

in the Medicare program. 

On May 31, 2000, CMS announced plans for Medicare to utilize newly available average 

wholesale prices for approximately 50 drugs, including albuterol. The new prices were 

developed for Medicaid through investigations conducted by the Department of Justice and the 

National Association of Medicaid Fraud Control Units. The revised pricing data was obtained 

from wholesale pricing catalogs and then provided to First DataBank, publisher of a pricing 

compendium used by the pharmaceutical industry. First DataBank agreed to use the new data 

when reporting average wholesale prices to the States. However, the Medicare, Medicaid, 

and SCHIP Benefits Improvement and Protection Act of 2000, enacted by Congress in 

December 2000, placed a moratorium on any decreases in Medicare drug reimbursement 

amounts. The Act required GAO to complete a comprehensive study addressing both the 

appropriateness of drug reimbursement amounts and the adequacy of current payments for 

related practice expenses. The Department of Health and Human Services must then revise 

CMS’ drug reimbursement methodology based on GAO’s recommendations. 

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The GAO issued the first of two reports addressing drug pricing issues on September 21, 

2001. This report found that physicians and suppliers can obtain covered drugs for 

substantially less than the Medicare reimbursement amount. The GAO concluded that 

Medicare should revise its drug payment methodology to more closely reflect available market 

prices. The second report, released October 31, 2001, found that payments made to 

oncologists relative to their practice expenses are close to the average for all specialties, and 

that the payments are 8 percent higher under the physician fee schedule then under the 

previous method that reimbursed based on the charges physicians billed for services. 

However, the GAO also found that recent modifications to the physician fee schedule 

substantially lowered payments for certain services, including chemotherapy administration. 

The GAO recommended changes to improve Medicare’s physician payment system. 

Department of Veterans Affairs Drug Reimbursement 

Unlike Medicare, the Department of Veterans Affairs (VA) purchases drugs for its healthcare 

system directly from manufacturers or wholesalers. There are several options available to the 

VA when purchasing drugs, with the most common being the Federal Supply Schedule. The 

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

commonly used products in any quantity while still obtaining the discounts associated with 

volume buying. Using competitive procedures, contracts are awarded to companies to 

provide supplies over a given period of time at the Federal Supply Schedule price. However, 

the VA is sometimes able to negotiate prices lower than Federal Supply Schedule amounts 

through other avenues such as blanket purchase agreements and VA national contracts. 

Cost of Drugs for Suppliers 

Suppliers can purchase drug products through group purchasing organizations, wholesalers, 

and directly from manufacturers. Group purchasing organizations provide their members with 

lower cost products by negotiating prices for specific drugs from manufacturers. The member 

can then purchase drugs at the negotiated price either directly from the manufacturer or from a 

wholesaler who accepts the group purchasing organization’s price. Wholesalers purchase 

large volumes of drugs from manufacturers and sell them directly to suppliers. 

Related Work by the Office of Inspector General 

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

drug reimbursement. Brief summaries of selected studies are presented in Appendix A. 

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4
METHODOLOGY 

Medicare Reimbursement 

Medicare classifies drugs using codes in the Healthcare Common Procedure Coding System. 

These codes, commonly referred to as procedure codes, define the type of drug and, in most 

cases, a dosage amount. There are currently two procedure 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 3 milliliter (ml) solution of 0.083 

percent albuterol. The procedure code for the unit dose form of albuterol is J7619. This code 

is defined as, “albuterol, all formulations including separated isomers, inhalation solution 

administered through durable medical equipment, unit dose form, per 1 milligram (mg).” We 

obtained current fee schedule reimbursement amounts for procedure code J7619 from the four 

durable medical equipment regional carriers. The reimbursement amount for albuterol was the 

same for each of the four carriers. 

We accessed CMS’ National Claims History File to determine Medicare’s total payments for 

albuterol and other inhalation drugs in 2000. We also used this file to analyze albuterol 

supplier data for the year 2000. 

Matching Procedure Codes to National Drug Codes 

The VA and suppliers use national drug codes rather than procedure codes to identify drug 

products. Because of these coding differences, we used the April 2001 CD-ROM edition of 

Drug Topics Red Book to identify the specific national drug codes that match the procedure 

code definition for albuterol. Each drug manufactured or distributed in the United States has a 

unique national drug code. National drug codes identify the manufacturer of the drug, the 

product dosage form, and the package size. Because Medicare uses only generic versions of 

albuterol to determine its reimbursement amount, we only selected generic albuterol national 

drug codes. We found 19 national drug codes for generic albuterol that matched the 

procedure code definition of J7619. 

The procedure code for the unit dose form of albuterol is reimbursed per mg. However, VA 

prices and wholesale prices were all based on 3 ml vials of 0.083 percent albuterol solution. 

Consequently, we needed to convert ml prices of albuterol into mg 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). For each national drug code, we multiplied 

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5
the number of milliliters of albuterol solution by 0.833 to determine the milligram amount, e.g., 

75 ml of solution multiplied by 0.833 equals 62.5 mg. We then divided the drug price by the 

number of milligrams to determine a per mg price. 

Department of Veterans Affairs Prices 

To determine the VA’s current costs for albuterol, we obtained a file from the VA website 

containing their 2001 contracted prices. The VA pricing file contained Federal Supply 

Schedule prices for 11 of the 19 matching albuterol national drug codes. To determine a 

single VA price, we calculated the median price per mg for these 11 codes. 

We also compared the 2001 VA prices to VA prices in the years 1998 through 2000. We 

determined the percentage change each year in VA prices, and multiplied this number by the 

amount Medicare paid in a given year. These figures represent the amount Medicare total 

payments would have increased or decreased if the Medicare reimbursement amount changed 

at the same rate as the VA price. In order to estimate this figure for 2001, we assumed that 

2001 Medicare payments for albuterol would equal 2000 payments. 

Prices Available to Suppliers and Wholesalers 

To determine actual wholesale prices for albuterol, we reviewed year 2001 print and online 

catalogs from four drug wholesalers and two group purchasing organizations. The six pricing 

sources we used provide drug products to suppliers and physician practices. We then 

computed a single catalog price for albuterol by calculating the median price per mg of the 

corresponding national drug codes. 

In addition to catalog prices, we also used actual albuterol invoices to determine supplier 

acquisition costs. The invoices were collected by the OIG during a review of inhalation drug 

utilization. The invoices were obtained during site visits to suppliers throughout the country, 

and were for albuterol purchased between June 1998 and August 2000. To determine a 

single invoice price, we calculated the median price per mg for the 91 invoice prices collected 

from suppliers. 

We also obtained manufacturer-reported wholesale acquisition costs from the April 2001 CDROM edition of Drug Topics Red Book. The Drug Topics Red Book defines wholesale 

acquisition cost as manufacturer-quoted list prices to wholesale distributors; these prices are 

not reflective of bids, rebates, volume purchase agreements, or other types of exclusive 

contracts. Eleven of the 19 albuterol national drug codes had wholesale acquisition costs 

Excessive Medicare Reimbursement for Albuterol 

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reported in 2001. From these costs, we calculated a median per mg wholesale acquisition 

cost for albuterol. 

Calculating Potential Medicare Savings 

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

1 mg of albuterol to VA prices, wholesale acquisition costs, catalog prices, and invoice prices. 

We determined the percentage difference in prices by subtracting the median 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 were 

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

amount Medicare paid for albuterol in 2000 to calculate dollar savings. A table showing the 

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

_____________ 

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

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

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7
FINDINGS 

Medicare and its beneficiaries would save $264 million a year 

if albuterol were reimbursed at the price paid by the VA 

The Medicare reimbursement amount for albuterol is over nine times greater than 

the median VA price 

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

$0.05 per mg, compared to $0.47 per mg for Medicare. We estimate that Medicare and its 

beneficiaries would save $264 million a year if reimbursement for albuterol were set at the 

median amount paid by the VA under the Federal Supply Schedule. The savings represent 89 

percent of the $296 million Medicare paid for albuterol in 2000. 

Medicare beneficiaries would receive $53 million of the $264 million in savings through 

reduced coinsurance payments. A Medicare beneficiary using a typical monthly amount of 

albuterol (250 mg) would pay $23.50 in Medicare coinsurance. That coinsurance amount is 

nearly double what the VA would pay outright ($12.50) to purchase one month’s supply of 

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

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

coinsurance based on various reimbursement levels. 

TABLE 1: COMPARISON OF ALBUTEROL PRICES 

Pricing Source 

Median 

Price 

per mg 

Cost of Typical 

Individual Monthly 

Usage (250 mg) 

Monthly Medicare 

Beneficiary 

Coinsurance Based 

on Source Price 

Potential Annual 

Medicare and 

Beneficiary 

Savings 

Medicare $0.47 $117.50 $23.50 N/A 

Department of Veterans Affairs $0.05 $12.50 $2.50 $264,222,803 

Wholesale Catalogs $0.08 $20.00 $4.00 $245,349,746 

Supplier Invoices $0.09 $22.50 $4.50 $239,058,727 

Wholesale Acquisition Cost $0.11 $27.50 $5.50 $226,476,689 

Sources: 2001 Medicare Carrier and Department of Veterans Affairs Websites, 2001 Wholesale Catalogs, 1998-2000 Supplier 

Invoices Collected by OIG, 2001 Drug Topics Red Book 

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Between 1998 and 2001, the median VA cost for albuterol decreased by over 50 

percent, while the Medicare reimbursement amount remained the same 

The VA price for albuterol has fallen by more than 50 percent over the last three years, from 

$0.11 per mg in 1998 to $0.05 per mg in 2001. During the same time period, Medicare’s 

reimbursement amount (based on reported average wholesale prices) has remained constant at 

$0.47 per mg. If the Medicare reimbursement amount for albuterol decreased at a rate equal 

to the VA’s purchase price, Medicare and its beneficiaries would have saved $68 million in 

1999 and $108 million in 2000. The program could save another $161 million in 2001. The 

graph below illustrates the changes in VA and Medicare pricing over the last 3 years. 

$0.47 $0.47 $0.47 $0.47 

$0.11 

$0.08 $0.07 

$0.05 

$0.00 

$0.05 

$0.10 

$0.15 

$0.20 

$0.25 

$0.30 

$0.35 

$0.40 

$0.45 

$0.50 

1998 1999 2000 2001 

Year 

Price per mg 

Medicare 

VA Median 

GRAPH 1: COMPARISON OF ALBUTEROL PRICES, 1998-2001 

Sources: Medicare Carrier and Department of Veterans Affairs Websites 

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Medicare and its beneficiaries would save between 

$226 million and $245 million a year if albuterol were 

reimbursed at prices available to wholesalers and suppliers 

Medicare payments for albuterol would be reduced by 83 percent if 

reimbursement amounts were based on prices listed in wholesale catalogs 

Medicare and its beneficiaries would save $245 million a year if the reimbursement amount for 

albuterol equaled the median price available to suppliers through wholesalers and group 

purchasing organizations. This represents 83 percent of the $296 million Medicare and its 

beneficiaries reimbursed for the drug in 2000. Catalog prices for generic albuterol ranged 

from a low of $0.07 per mg to a high of $0.15 per mg. The Medicare reimbursement amount 

($0.47 per mg) was nearly six times more than the median catalog price ($.08 per mg). 

Like VA prices, catalog prices for albuterol have gone down over the last several years. In 

earlier reports, we found that the average catalog price for albuterol was $0.23 per mg in 

1996, and $0.13 per mg in 2000. The current catalog price of $0.08 per mg of albuterol is 65 

percent less than the catalog price of the drug five years earlier. 

Medicare payments for albuterol would be reduced by 81 percent if 

reimbursement amounts were based on supplier invoice prices 

Invoices reviewed by the OIG listed prices ranging from $0.08 to $0.14 per mg for albuterol 

purchased by suppliers between 1998 and 2000. The median price for albuterol purchased 

by these suppliers was $0.09 per mg, 81 percent less than the Medicare reimbursement 

amount. Medicare and its beneficiaries would save $239 million a year if albuterol were 

reimbursed at the median invoice price. 

Medicare payments for albuterol would be reduced by 77 percent if 

reimbursement amounts were based on manufacturer-reported wholesale 

acquisition costs 

Published wholesale acquisition costs for albuterol ranged from $0.09 to $0.18 per mg in April 

2001. The median wholesale acquisition cost was $0.11 per mg. Individual drug 

manufacturers reported these wholesale acquisition costs to Drug Topics Red Book. The 

Drug Topics Red Book defines wholesale acquisition cost as manufacturer-quoted list prices 

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to wholesale distributors, not reflective of bids, rebates, volume purchase agreements, or other 

types of exclusive contracts. 

If Medicare based its reimbursement for albuterol on manufacturer-reported wholesale acquisition 

costs rather than average wholesale prices, the program and its beneficiaries would save $226 million 

a year. 

Less than one percent of albuterol suppliers were 

responsible for providing the majority of the product to 

Medicare beneficiaries in 2000 

Medicare reimbursed 6,522 suppliers for albuterol claims in 2000. However, just 34 of these 

suppliers received more than $1 million each in Medicare reimbursement for albuterol in 2000, 

with five having between $11 million and $35 million in paid claims. These 34 suppliers, who 

all provided home-delivery/mail-order services to beneficiaries, received 63 percent of the 

Medicare payments for albuterol in 2000. Therefore, the majority of the albuterol supplied to 

Medicare beneficiaries was provided by suppliers that purchase a large quantity of the 

product. We believe that suppliers that purchase albuterol in such large quantities may receive 

volume discounts from manufacturers and wholesalers. 

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RECOMMENDATION 

Medicare should reduce excessive reimbursement amounts for albuterol 

Despite numerous attempts by the Centers for Medicare & Medicaid Services (CMS) to 

lower reimbursement amounts for prescription drugs, the findings of this report illustrate that 

Medicare still pays too much for albuterol. We have consistently found that the published 

average wholesale prices currently used by Medicare to establish reimbursement amounts bear 

little or no resemblance to actual wholesale prices that are available to suppliers and large 

government purchasers. 

We understand that unlike most drugs covered by Medicare, albuterol is usually provided by 

suppliers rather than administered by physicians. These suppliers obviously need to make a 

profit from the products they provide, yet the spread between what Medicare reimburses for 

albuterol and the price at which suppliers are able to purchase the drug is significant. 

Reimbursement levels for albuterol not only impact the Medicare program, but also affect 

Medicare beneficiaries who pay increased coinsurance amounts. 

We offer the following options for reducing excessive reimbursement amounts for covered 

drugs: 

< Authorizing a commission to set payment rates. 

< Calculating national estimated acquisition costs based upon the average manufacturer 

prices reported to the Medicaid program. 

< Collecting more accurate average wholesale prices from drug pricing catalogs or other 

sources. 

< Increasing the discount off the published average wholesale prices. 

< Basing payment on physician/supplier acquisition costs. 

< Establishing manufacturers’ rebates similar to those used in the Medicaid program. 

< Creating a fee schedule for covered drugs based on the Federal Supply Schedule. 

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< Using CMS’ inherent reasonableness authority. 

< Using competitive bidding. 

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Agency Comments 

The CMS agreed that the amounts being reimbursed for drugs in the Medicare program are 

excessive, and that it is clear that the payment system for outpatient drugs needs revision. The 

agency noted that it must find a way to ensure that the program pays appropriately for all 

Medicare benefits, including covered drugs and the services required to furnish those drugs. 

The CMS went on to state that they are looking forward to working with the Congress and the 

OIG to revise the Medicare payment system for prescription drugs. The full text of CMS’ 

comments is presented in Appendix C. 

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APPENDIX A 

Selected OIG Reports on Drug Reimbursement

Medicare Reimbursement of Prescription Drugs (OEI-03-00-00310), January 2001. We found

that Medicare and its beneficiaries would save $1.6 billion a year if 24 drugs were reimbursed at

amounts available to the VA. We also found that Medicare would save $761 million a year by

paying the actual wholesale price for 24 drugs.

Medicare Reimbursement of Albuterol (OEI-03-00-00311), June 2000. We found that

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

reimbursed at amounts available through Medicaid and the VA, respectively. 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.

Comparing Drug Reimbursement: Medicare and the Department of Veterans Affairs

(OEI-03-97-00293), November 1998. We found that Medicare and its beneficiaries would save $1

billion in 1998 if the allowed amounts for 34 drugs were equal to prices obtained by the VA. 

Furthermore, Medicare allowed between 15 and 1600 percent more than the VA for the 34 drugs

reviewed.

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.

Excessive Medicare Payments for Prescription Drugs (OEI-03-97-00290), December 1997. 

We found that Medicare allowances for 22 drugs exceeded actual wholesale prices by $447

million in 1996. For more than one-third of the 22 drugs reviewed, Medicare allowed amounts were

more than double the actual wholesale prices available to physicians and suppliers. Furthermore, we

found that there was no consistency among Medicare carriers in establishing and updating drug

reimbursement amounts. 

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.

Excessive Medicare Reimbursement for Albuterol 

OEI-03-01-00410 

15
APPENDIX A 

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. 

Excessive Medicare Reimbursement for Albuterol 

OEI-03-01-00410 

16
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 2000 total payments ($295,677,899) 

for albuterol by the percentage difference in price. 

Price Source 

Range of per 

mg Prices 

Median 

Price 

per mg 

Medicare 

Price 

per mg 

Percentage 

Difference 

in Price* 

Potential 

Medicare and 

Beneficiary 

Savings 

Department of Veterans 

Affairs $0.05 to $0.10 $0.05 $0.47 89.4% $264,222,803 

Wholesale Catalogs $0.07 to $0.15 $0.08 $0.47 83.0% $245,349,746 

Supplier Invoices $0.08 to $0.14 $0.09 $0.47 80.9% $239,058,727 

Wholesale Acquisition Cost $0.09 to $0.18 $0.11 $0.47 76.6% $226,476,689 

*Percentage rounded to the nearest tenth 

Excessive Medicare Reimbursement for Albuterol 

OEI-03-01-00410 

17
APPENDIX 

C 

Centers for Medicare & Medicaid Services Comments

Excessive Medicare Reimbursement for Albuterol 

OEI-03-01-00410 

18
APPENDIX 

C 

Excessive Medicare Reimbursement for Albuterol 

OEI-03-01-00410 

19