Department of Health and Human Services 

OFFICE OF 

INSPECTOR GENERAL 

JUNE GIBBS BROWN 

Inspector General 

JUNE 2000 

OEI-03-00-00020 

Medicare Reimbursement of 

End Stage Renal Disease Drugs 
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 

Scott Horning, Technical Support Staff 

Linda Moscoe, Technical Support Staff 

Brian Ritchie, 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 inspection compares Medicare payment amounts for end stage renal disease drugs 

(ESRD) with amounts paid by Medicaid and the Department of Veterans Affairs. 

BACKGROUND 

Generally, Medicare does not pay for most over-the-counter or outpatient prescription 

drugs. However, Medicare Part B does cover certain drugs furnished by independent 

dialysis facilities. These drugs must be medically necessary and be included in the list of 

“separately billable drugs” found in the Renal Dialysis Facility Manual, Section 318.1. 

Medicare’s total charges for ESRD drugs provided by independent dialysis facilities 

exceeded $1.4 billion in 1998. 

Prescription drugs furnished by independent dialysis facilities are reimbursed by Medicare 

fiscal intermediaries from the Medicare Part B fund. In general, a covered drug is 

reimbursed at 95 percent of the drugs’ average wholesale price (AWP). Medicare 

beneficiaries are responsible for a 20 percent copayment. State Medicaid agencies have 

the authority to develop their own reimbursement methodology for outpatient prescription 

drugs under the pharmacy benefit. Like Medicare, most Medicaid agencies use AWP as 

the basis for calculating their drug reimbursement amounts. Additionally, drug 

manufacturers are required by law to enter into rebate agreements with Medicaid in order 

to participate in the program. 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 focused our inspection on just five drug codes, which accounted for $379 million in 

total charges to Medicare in 1998. We compared Medicare’s fourth quarter 1999 

reimbursement amounts for these drugs to Medicaid amounts and VA acquisition costs. 

FINDINGS 

Medicare allowed amounts would be nearly halved for five ESRD drugs if 

amounts were based on VA acquisition costs 

Medicare allowed amounts during the fourth quarter of 1999 were greater that the VA 

acquisition costs for the five drugs reviewed. For two drugs, Medicare allowed amounts 

Medicare Reimbursement of ESRD Drugs 1 OEI-03-00-00020 
were more than double the VA’s contracted price. Medicare would save between 37 and 

56 percent for each of the five drugs if its allowed amounts were equal to VA acquisition 

costs. 

Medicare would save between 5 and 38 percent for five ESRD drugs if its allowed 

amounts were equal to Medicaid reimbursement including rebates 

Medicare allowed amounts were greater than Medicaid amounts for each of the five 

reviewed drugs during the fourth quarter of 1999. Medicaid amounts include any rebates 

calculated for the drugs. Medicare allowed amounts exceeded Medicaid amounts by a 

only a small percentage for two of the drugs since Medicaid agencies did not receive 

rebates for these specific products. For two drugs, the Medicaid amount was 

approximately one-third less than the Medicare allowed amount. 

While we were able to determine percentage differences between the Medicare allowed amounts 

and other agencies’ costs for the reviewed drugs, we could not prepare a precise estimate of 

dollar savings. The only reimbursement information available to us represented the total amount 

billed to Medicare for ESRD drugs and not the total amount which was paid. However, if the 

percentage savings that we calculated for each drug were applied to Medicare’s total charges (i.e., 

the amount billed), then Medicare could have saved up to $42 million in 1998 if their allowed 

amounts equaled Medicaid amounts. Medicare could have saved up to $162 million in 1998 if 

their allowed amounts equaled VA acquisition costs. Because total charges are often inflated, we 

recognize that the estimates provided are the most that Medicare could have possibly saved. 

However, even if the savings did not reach these maximum levels, the potential savings would still 

be substantial. 

RECOMMENDATION 

The Department of Veterans Affairs (VA) purchases drugs for its healthcare system 

directly from manufacturers or wholesalers. Conversely, Medicare and Medicaid 

reimburse doctors and suppliers for drugs which they administer or supply to beneficiaries. 

We recognize that the Health Care Financing Administration (HCFA), Medicaid, and the 

VA operate under different statutory constraints. Nevertheless, the fact remains that other 

government entities can get certain prescription drugs at drastically lower prices than 

Medicare. 

Our current findings provide further support for recommendations made in earlier reports. 

We previously recommended, and HCFA concurred, that HCFA re-examine its Medicare 

drug reimbursement methodologies with the goal of reducing payments as appropriate. 

We outlined a number of options for implementing this recommendation, including: (1) 

greater discounting of published average wholesale prices, (2) basing payment on 

acquisition costs, (3) establishing manufacturers’ rebates similar to those used in the 

Medicaid program, and (4) using competitive bidding. 

Medicare Reimbursement of ESRD Drugs 2 OEI-03-00-00020 
We continue to support the need for lower drug 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. Therefore, we 

recommend that HCFA press for legislative efforts which would (1) immediately lower the 

price of these five ESRD drugs, (2) use the Federal Supply Schedule (FSS) as a basis for 

developing Medicare allowed amounts, or (3) reform the current drug pricing 

methodology in another manner which would substantially lower unreasonable 

prescription drug prices. 

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 D. 

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 ESRD Drugs 3 OEI-03-00-00020 
TABLE OF CONTENTS 

PAGE

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

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

FINDINGS

Medicare payments compared to VA ...................................... 10

Medicare payments compared to Medicaid .................................. 10

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

APPENDICES

A. Previous OIG Reports on Medicare Drug Reimbursement ................... 14

B. Description of HCPCS Codes ......................................... 16

C. State Medicaid Outpatient Drug Pricing Methodologies ..................... 17

D. Health Care Financing Administration Comments .......................... 19

Medicare Reimbursement of ESRD Drugs 4 OEI-03-00-00020 
INTRODUCTION 

PURPOSE 

This inspection compares Medicare payment amounts for end stage renal disease (ESRD) 

drugs with amounts paid by Medicaid and the Department of Veterans Affairs. 

BACKGROUND 

Medicare Coverage of ESRD Drugs 

Generally, Medicare does not pay for most over-the-counter or outpatient prescription 

drugs. However, under specific circumstances, Medicare Part B will cover drugs used in 

association with organ transplantations, chemotherapy, durable medical equipment, 

infusion devices, and vaccinations. Additionally, Medicare Part B covers certain drugs 

furnished by independent dialysis facilities that are not included in the ESRD composite 

rate payment. These drugs must be medically necessary and be included in the list of 

“separately billable drugs” found in the Renal Dialysis Facility Manual, Section 318.1. 

The ESRD facility composite rate payment includes almost all per treatment costs for an 

ESRD patient and is paid by fiscal intermediaries from the Part A fund. Separately billable 

ESRD drugs furnished by independent dialysis facilities are reimbursed by fiscal 

intermediaries from the Part B fund. 

Medicare’s total charges for ESRD drugs provided by independent dialysis facilities 

exceeded $1.4 billion in 1998. This figure represents the amount which was billed to 

Medicare. 

Medicare Drug Reimbursement 

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

program, has required Medicare Part B carriers to calculate payment allowances for 

covered drugs. To ensure uniform pricing, Part B carriers are then required to furnish the 

allowed amounts for the drugs to the Part A intermediaries operating in their jurisdiction. 

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

Section 4556 of the Balanced Budget Act of 1997. Carriers base their payment amount 

for a 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. If a 

drug has 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 

Medicare Reimbursement of ESRD Drugs 5 OEI-03-00-00020 
AWP is lower than the median generic price, Medicare reimburses 95 percent of the

lowest brand price. Medicare beneficiaries are responsible for a 20 percent copayment for

covered drugs.

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. In short, this provision requires that before

HCFA can invoke this authority, a study must be performed by the Comptroller General to

determine the potential effects of utilizing inherent reasonableness measures. 

Furthermore, the criteria used in identifying excessive payments must be re-evaluated, and

its validity and reliability ensured. 

Medicaid Drug Reimbursement 

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

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

agencies use AWP as the basis for calculating their reimbursement amounts for outpatient 

drugs. However, Medicaid agencies generally use a more deeply discounted AWP than 

does Medicare. 

Additionally, drug manufacturers are required by Federal law to enter into rebate 

agreements with Medicaid in order to be eligible for Medicaid reimbursement of their 

products. While most drugs are subject to these requirements, certain products, such as 

vaccines, which meet specific statutory guidelines are exempt from rebates. 

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. 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 over a given period of time. 

Although the General Services Administration awards most Federal Supply Schedule 

Medicare Reimbursement of ESRD Drugs 6 OEI-03-00-00020 
contracts, the VA awards contracts for certain medical items. 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. 

Related Work by the Office of Inspector General 

The Office of Inspector General (OIG) has previously studied a number of issues related 

to Medicare prescription drug reimbursement. Brief summaries of selected studies are 

presented in Appendix A. 

METHODOLOGY 

Medicare Charges for Prescription Drugs 

To determine total Medicare charges for ESRD drugs, we compiled a list of revenue 

center codes representing drugs covered by Medicare in 1998. Revenue center codes are 

codes which facilities use to define the product or service provided. We selected 1998 

because it was the most recent year with complete data in HCFA’s National Claims 

History file. We then determined the Medicare total charges and services billed by 

independent dialysis facilities for each of these revenue center codes. We aggregated the 

charges for the individual revenue center codes in order to determine total Medicare 

charges for ESRD drugs provided by independent dialysis facilities in 1998. 

Medicare Part B’s total charges for ESRD drugs furnished by independent dialysis 

facilities totaled more than $1.4 billion in 1998. Approximately $1 billion of the total 

charges were for epoetin alfa (revenue center codes 0634 and 0635). We decided to 

exclude epoetin alfa from our review because its pricing had been previously reviewed by 

our Office of Audit Services. Nearly all of remaining charges were made using revenue 

center code 0636, defined as “drugs requiring specific identification--detailed coding.” 

Drugs billed using this revenue center code are specifically identified using the HCFA 

Common Procedure Coding System (HCPCS). A HCPCS code defines the type of drug 

billed, and in most cases, a dosage amount. Using the National Claims History file, we 

determined that in 1998, five HCPCS codes accounted for $379 million (90 percent) of 

the $424 million in total charges for revenue center code 0636. A list of the reviewed 

HCPCS codes along with their definitions is presented in Appendix B. 

Medicare Pricing for ESRD Drugs 

Because Medicare does not have uniform national allowed amounts for prescription drugs, 

we collected payment information from individual contractors. We obtained Medicare 

drug payment amounts for the five contractors with the highest charges for ESRD drugs in 

1998: Trailblazer Health Enterprises of Texas, Blue Cross and Blue Shield of Georgia, 

Blue Cross of California, Blue Cross and Blue Shield of Florida, and Empire Blue Cross 

Medicare Reimbursement of ESRD Drugs 7 OEI-03-00-00020 
and Blue Shield of New York. To determine a single Medicare allowed amount, we 

calculated median prices for each HCPCS code based on the information provided. 

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. 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 of these coding differences, we used Drug Topics Red Book to identify the 

specific NDCs that would match the HCPCS code definition for each of the five drugs in 

our review. For each drug, we selected the NDCs which met the exact dosage and 

administration method delineated in the HCPCS code description. When this was not 

possible, we chose NDCs with dosage amounts for which a conversion factor to the 

HCPCS definition could be readily determined. Four of the five HCPCS codes had only 

one NDC which met our matching criteria. One HCPCS code had three matching NDCs. 

Medicaid Pricing of ESRD Drugs 

For our comparison, we used Medicaid reimbursement for prescription drugs under each 

state’s pharmacy benefit. We gathered this information from the publication 

Pharmaceutical Benefits under State Medical Assistance Programs, December 1998 to 

determine each Medicaid agency’s reimbursement methodology for outpatient prescription 

drugs. Forty-five of the 51 agencies utilized pricing methodologies that were based on 

AWP. The remaining six agencies priced their drugs using more complicated methods and 

were eliminated from our review. We arrayed the remaining 45 Medicaid agencies by the 

amount that their pricing methodology discounted AWP. We then calculated the mean 

(9.87 percent), median (10 percent), and modal (10 percent) AWP discounts. A complete 

list of each Medicaid agency’s pricing methodology is presented in Appendix C. 

We used Drug Topics Red Book October 1999 Update to determine the fourth quarter 

1999 AWP of the selected codes. We then determined base Medicaid prices for the five 

drugs by reducing the AWP by the median discount of 10 percent, recognizing that some 

States may pay slightly more and others slightly less. If the NDC dosage of the drug did 

not exactly match the HCPCS dosage, we multiplied the base Medicaid price by a 

conversion factor so that the Medicaid and Medicare prices would be for equal amounts of 

the drug. 

We accessed the Medicaid Drug Rebate Initiative system to ascertain the Medicaid rebate 

amounts for each of the drugs. We used the most recent rebate amounts available for each 

NDC code, which in most cases was the third quarter of 1999. For the one drug which 

had multiple NDC matches, we chose the most conservative rebate amount. Additionally, 

Medicaid did not receive rebates for two of the drugs. For three NDCs, the 

Medicare Reimbursement of ESRD Drugs 8 OEI-03-00-00020 
listed rebate was a for a dosage amount which was not equal to the HCPCS dosage 

amount. In these cases, a conversion factor was used to calculate a rebate amount for the 

HCPCS dosage. For each drug, we calculated a new Medicaid price by subtracting any 

rebate amounts from the base Medicaid price. 

VA Pricing of ESRD Drugs 

To determine the VA’s fourth quarter 1999 acquisition costs for the drugs in our review, 

we obtained a file from the VA containing their contracted acquisition costs. We looked 

up the corresponding contract price for each of the drugs by NDC code. For the drug 

which had multiple NDC matches, we took the highest VA price for the drug. We used 

the Federal Supply Schedule price for comparison purposes. 

If the NDC dosage of the drug did not exactly match the HCPCS dosage, we multiplied 

the contracted price by a conversion factor so that the VA and Medicare prices would be 

for equal amounts of the drug. 

Calculating Potential Medicare Savings 

To calculate potential Medicare savings, we compared the Medicare, Medicaid, and VA 

prices. For each drug, we determined the percentage difference between the Medicare 

payment amount and the other agencies’ payment amounts. This percentage indicated 

how much Medicare could have saved on each of the drugs if their payment amounts 

equaled amounts paid by Medicaid and the VA. 

Medicare Reimbursement of ESRD Drugs 9 OEI-03-00-00020 
FINDINGS 

Medicare allowed amounts would be nearly halved for five 

ESRD drugs if amounts were based on VA acquisition costs 

Medicare allowed amounts during the fourth quarter of 1999 were greater than VA 

acquisition costs for the five drugs reviewed. For two drugs, levocarnitine and the 

hepatitis B vaccine, Medicare allowed amounts were more than double the VA’s 

contracted price. Medicare would save between 37 and 56 percent for each of the five 

drugs if its allowed amounts were equal to VA acquisition costs. Table 1 provides the 

reviewed drugs, their comparative costs to Medicare and the VA, and potential Medicare 

savings. 

Table 1: Medicare and VA Drug Payment Amounts 

HCPCS 

Code 

Generic 

Drug Name 

Allowed 

Amount 

Medicare 

Acquisition 

Cost 

VA 

Medicare 

Savings 

Potential 

J0635 Calcitriol $12.83 $8.10 36.9% 

J1760 Iron Dextran $35.82 $19.41 45.8% 

J1955 Levocarnitine $34.20 $15.08 55.9% 

J3364 Urokinase $56.61 $31.70 44.0% 

90747 Hepatitis B Vaccine $172.23 $84.36 51.0% 

Medicare would save between 5 and 38 percent for five 

ESRD drugs if its allowed amounts were equal to Medicaid 

reimbursement including rebates 

Medicare allowed amounts were greater than Medicaid amounts for each of the five 

reviewed drugs during the fourth quarter of 1999. Medicaid amounts include any rebates 

that were calculated for the drugs. Medicare allowed amounts exceeded Medicaid 

amounts by a only a small percentage for two of the drugs, calcitriol and the hepatitis B 

Medicare Reimbursement of ESRD Drugs 10 OEI-03-00-00020 
vaccine, because Medicaid agencies did not receive rebates for these specific products. 

For two drugs, levocarnitine and urokinase, the Medicaid amount was approximately onethird less than the Medicare allowed amount. Table 2 provides the reviewed drugs, their 

comparative costs to Medicare and Medicaid, and potential Medicare savings. 

Table 2: Medicare and Medicaid Payment Amounts 

HCPCS 

Code 

Generic 

Drug Name 

Allowed 

Amount 

Medicare 

Amounts with 

Rebate 

Medicaid 

Medicare 

Savings 

Potential 

J0635 Calcitriol $12.83 $12.15 5.3% 

J1760 Iron Dextran $35.82 $31.77 11.3% 

J1955 Levocarnitine $34.20 $23.85 30.3% 

J3364 Urokinase $56.61 $35.23 37.8% 

90747 Hepatitis B Vaccine $172.23 $163.17 5.3% 

While we were able to determine percentage differences between the Medicare allowed amounts 

and other agencies’ costs for the reviewed drugs, we could not prepare a precise estimate of 

dollar savings. The only reimbursement information available to us represented the total amount 

billed to Medicare for ESRD drugs and not the total amount which was paid. However, if the 

percentage savings that we calculated for each drug were applied to Medicare’s total charges (i.e., 

the amount billed), then Medicare could have saved up to $42 million in 1998 if their allowed 

amounts equaled Medicaid amounts. Medicare could have saved up to $162 million in 1998 if 

their allowed amounts equaled VA acquisition costs. Because total charges are often inflated, we 

recognize that the estimates provided are the most that Medicare could have possibly saved. 

However, even if the savings did not reach these maximum levels, the potential savings would still 

be substantial. 

Medicare Reimbursement of ESRD Drugs 11 OEI-03-00-00020 
RECOMMENDATION 

The Department of Veterans Affairs (VA) purchases drugs for its healthcare system 

directly from manufacturers or wholesalers. Conversely, Medicare and Medicaid 

reimburse doctors and suppliers for drugs which they administer or supply to beneficiaries. 

We recognize that the Health Care Financing Administration (HCFA), Medicaid, and the 

VA operate under different statutory constraints. Nevertheless, the fact remains that other 

government entities can get certain prescription drugs at drastically lower prices than 

Medicare. 

Our current findings provide further support for recommendations made in earlier reports. 

We previously recommended, and HCFA concurred, that HCFA re-examine its Medicare 

drug reimbursement methodologies with the goal of reducing payments as appropriate. 

We outlined a number of options for implementing this recommendation, including: (1) 

greater discounting of published average wholesale prices, (2) basing payment on 

acquisition costs, (3) establishing manufacturers’ rebates similar to those used in the 

Medicaid program, and (4) using competitive bidding. 

We continue to support the need for lower drug 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. Therefore, we 

recommend that HCFA press for legislative efforts which would (1) immediately lower the 

price of these five ESRD drugs, (2) use the Federal Supply Schedule (FSS) as a basis for 

developing Medicare allowed amounts, or (3) reform the current drug pricing 

methodology in another manner which would substantially lower unreasonable 

prescription drug prices. 

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 D. 

Medicare Reimbursement of ESRD Drugs 12 OEI-03-00-00020 
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 ESRD Drugs 13 OEI-03-00-00020 
APPENDIX A 

Previous OIG Reports on Medicare Drug Reimbursement 

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. Additionally, 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. 

The Impact of High-Priced Generic Drugs on Medicare and Medicaid (OEI-03-97-00510),

July 1998. We found that Medicare and its beneficiaries could have saved between $5 million

and $12 million for four drugs if reimbursement had not been based on higher-priced generic

versions. Florida’s Medicaid program would have saved half a million dollars for eight drugs in

1996 if higher-priced generic drugs had been reimbursed at brand prices.

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 supplers. 

Furthermore, we found that there was no consistency among Medicare carriers in establishing and

updating drug reimbursement amounts. 

Appropriateness of Medicare Prescription Drug Allowances (OEI-03-96-00420), May 1996. 

We found that under a drug rebate program similar to Medicaid’s, Medicare would have saved

$122 million for 17 prescription drugs in 1994. Medicare could have saved an additional $144

million in 1994 had the program employed a discounted AWP drug reimbursement formula. We

also found that the lack of an NDC-based billing system would prevent HCFA from taking

advantage of rebates and other discounted reimbursement formulas.

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.

Medicare Reimbursement of ESRD Drugs 14 OEI-03-00-00020 
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, and that the program could have saved $94 million 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 ESRD Drugs 15 OEI-03-00-00020 
APPENDIX B 

Description of HCPCS Codes

HCPCS 

Code 

Generic 

Name 

Method of 

Administration 

Dosage 

Amount 

J0635 Calcitriol Injection 1 mcg 

J1760 Iron Dextran Injection 2 cc 

J1955 Levocarnitine Injection 1 g 

J3364 Urokinase Injection 5000 iu 

90747 Hepatitis B Vaccine Injection 40 mcg1 

1

The dosage amount for HCPCS code 90747 is defined as “dialysis or immuno-suppressed patient 

dosage,” which according to the Physician’s Desk Reference, is equal to 40 mcg. 

Medicare Reimbursement of ESRD Drugs 16 OEI-03-00-00020 
APPENDIX C 

State Medicaid Outpatient Drug Pricing Methodologies

State Reimbursement Basis 

Alabama WAC plus 9.2% 

Alaska AWP minus 5% 

Arizona AWP minus 10% 

Arkansas AWP minus 10.5% 

California AWP minus 5% 

Colorado AWP minus 10% or WAC plus 18% 

Connecticut AWP minus 12% 

Delaware AWP minus 12.9% 

District of Columbia AWP minus 10% 

Florida WAC plus 7% 

Georgia AWP minus 10% 

Hawaii AWP minus 10.5% 

Idaho AWP 

Illinois AWP minus 10% for single-source drugs, AWP minus 12% for multi-source drugs 

Indiana AWP minus 10% 

Iowa AWP minus 10% 

Kansas AWP minus 10% 

Kentucky AWP minus 10% 

Louisiana AWP minus 10.5% 

Maine AWP minus 10% 

Maryland WAC plus 10% 

Massachusetts WAC plus 10% 

Michigan AWP minus 13.5% or AWP minus 15.1% 

Minnesota AWP minus 9% 

Mississippi AWP minus 10% 

Missouri AWP minus 10.43% 

Medicare Reimbursement of ESRD Drugs 17 OEI-03-00-00020 
APPENDIX C 

State Reimbursement Basis 

Montana AWP minus 10% 

Nebraska AWP minus 8.71% 

Nevada AWP minus 10% 

New Hampshire AWP minus 12% 

New Jersey AWP minus 10% 

New Mexico AWP minus 12.5% 

New York AWP minus 10% 

North Carolina AWP minus 10% 

North Dakota AWP minus 10% 

Ohio AWP minus 11% 

Oklahoma AWP minus 10.5% 

Oregon AWP minus 11% 

Pennsylvania AWP minus 10% 

Rhode Island WAC plus 5% 

South Carolina AWP minus 10% 

South Dakota AWP minus 10.5% 

Tennessee Individual managed-care and pharmacy benefit management organizations determine 

price 

Texas AWP minus 10.49% or WAC plus 12% 

Utah AWP minus 12% 

Vermont AWP minus 10% 

Virginia AWP minus 9% 

Washington AWP minus 11% 

West Virginia AWP minus 12% 

Wisconsin AWP minus 10% 

Wyoming AWP minus 4% 

WAC=wholesalers acquisition cost; AWP=average wholesale price

Source: Pharmaceutical Benefits Under State Medical Assistance Programs, December 1998

Medicare Reimbursement of ESRD Drugs 18 OEI-03-00-00020 
APPENDIX D 

Health Care Financing Administration Comments 

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

Administration. 

Medicare Reimbursement of ESRD Drugs 19 OEI-03-00-00020 
APPENDIX D 

Medicare Reimbursement of ESRD Drugs 20 OEI-03-00-00020 
APPENDIX D 

Medicare Reimbursement of ESRD Drugs 21 OEI-03-00-00020 
APPENDIX D 

Medicare Reimbursement of ESRD Drugs 22 OEI-03-00-00020 
APPENDIX D 

Medicare Reimbursement of ESRD Drugs 23 OEI-03-00-00020 
APPENDIX D 

Medicare Reimbursement of ESRD Drugs 24 OEI-03-00-00020