Department of Health and Human Services 

OFFICE OF 

INSPECTOR GENERAL 

SUPPLIERS’ ACQUISITION COSTS 

FOR ALBUTEROL SULFATE 
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 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 INVESTIGATIONS 

The OIG’S 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 Robert A. Vito, Regional Inspector General. 

PHILADELPHIA REGIONAL STAFF HEADQUARTERS STAFF 

Robert A. Katz, ProjectLeader Mary Beth Clarke, ProgramSpecialist


Amy J. Sernyak, ProgramAnalyst


Karen Folk, Intern


To obtain copies of this report, please call the Philadelphia Regional Office at (800) 531-9562 
Department of Health and Human Services 

OFFICE OF 

INSPECTOR GENERAL 

SUPPLIERS’ ACQUISITION COSTS 

FOR ALBUTEROL SULFATE 
EXECUTIVE SUMMARY 

PURPOSE 

This report examines suppliers’ acquisition costs and Medicare allowances for 

albuterol sulfate, an inhalation prescription drug used in conjunction with nebulizers. 

BACKGROUND 

Title XVIII of the Social Security Act prescribes coverage requirements under Part B 

of the Medicare program. Part B covered items and services include durable medical 

equipment (DME) as well as certain outpatient prescription drugs. The Health Care 

Financing Administration (HCFA) administers the Medicare program. 

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 durable medical equipment (DME), such as a nebulizer. For such 

drugs, Medicare computes an allowed amount based on the lower of estimated 

acquisition costs (EACS) or the median of national average wholesale prices (AWPS). 

Medicare allowed amounts for all inhalation drugs remained relatively stable during 

1990 through 1992, never exceeding about $78 million annually. In 1993, allowances 

rose to about $170 million, and climbed to about $227 million in 1994, an increase of 

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

1994 through February 28, 1995--allowances for inhalation drugs totaled approximately 

$269 million. The subject of this study--albuterol sulfate--accounted for more than 

$182 million in allowances during the 14-month period. 

In this report, we examine Medicare payments for albuterol sulfate compared to 

suppliers’ acquisition costs for the drug. Albuterol sulfate is the most commonly 

prescribed inhalation drug used for nebulizer therapy. This report is one of a series of 

Office of Inspector General (OIG) inspections concerning Medicare payments for 

outpatient prescription drugs in general and inhalation drugs in particular. 

FINDINGS 

Medicarek allowances for albuterol sulfate substantidj exceed supplitm’ acquisition costs 

for the drug. 

Suppliers pay an average cost of $0.19 per milliliter (ml) to purchase albuterol 

sulfate, while Medicare’s allowed amounts ranged from $0.40 per ml to $0.43 

per ml during the period of our review. Medicare could have saved $94 million 

during the 14-month period of our review if albuterol sulfate allowances had 

been based on the average of supplier invoice costs. 

i 
Average supplier costs for albuterol sulfate ranged from $0.14 per ml to $0.23 

per ml depending on the purchase source. Suppliers purchasing albuterol 

sulfate directly from a manufacturer paid the lowest average cost, $0.14 per ml. 

When purchased from wholesalers, suppliers paid an average of $0.20 per ml. 

Suppliers purchasing the drug from pharmacies paid the highest average cost, 

$0.23 per ml. Most of the albuterol sulfate billed to the Medicare program was 

the generic form of the drug. 

RECOMMENDATIONS 

The findings of this report indicate that Medicare’s allowances for albuterol sulfate 

substantially exceed suppliers’ costs for the drug. During the period of our review, 

Medicare reimbursed suppliers at allowed amounts ranging from $0.40 to $0.43 per ml 

of albuterol sulfate. These allowances were based on drug manufacturers’ AWPS. 

Current HCFA regulations allow Medicare reimbursement to be based on the lower of 

EAC or median AWP. However, HCFA has been unsuccessful in obtaining the data 

to determine EAC. 

We believe our invoice cost analysis further supports the recommendation made in an 

earlier OIG report entitled Medicare Payments for Nebulizer Drugs (OEI-03-94-O0390). 

In that report, we suggested various options and recommended that HCFA should 

reexamine its Medicare drug reimbursement methodologies with the goal of reducing 

payments for prescription drugs. Options included a discounted wholesale price, 

manufacturers’ rebates, competitive bidding, inherent reasonableness, and acquisition 

cost. For our readers’ convenience, we have included the full text of these options in 

the Recommendation section of this report. 

HCFA COMMENTS 

The HCFA concurred with our recommendation. In exploring new strategies for 

changing Medicare’s payment for prescription drugs, HCFA has constructed a 

framework to calculate drug prices centrally. They are also reviewing other 

approaches that could improve Medicare drug reimbursement. For the complete text 

of HCFA’S comments, see Appendix D. 

OIG RESPONSE 

We support HCFA’S efforts to revise its drug reimbursement mechanisms to more 

appropriately pay for prescription drugs covered under the Medicare program. We 

believe revisions to the current payment methodologies that take into account the 

actual costs of these drugs would provide significant savings to the Medicare program. 

11 
TABLE OF CONTENTS


EXECUTIVE SUMMARY


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


FINDINGS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ...6


. Medicare’s allowances exceed suppliers’ acquisition costs . . . . . . . . . . . . . . . . . 6


RECOMMENDATIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9


APPENDICES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .


kNonrespondent Analysis.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ..A-l


B: Cost Estimates and Confidence Intervals . . . . . . . . . . . . . . . . . . . . . . . . . . . . B-1


C Calculation of Potential Medicare Savings . . . . . . . . . . . . . . . . . . . . . . . . . . . C-1


D: Agency Comments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ..D-l

INTRODUCTION


PURPOSE 

This report examines suppliers’ acquisition costs and Medicare allowances for 

albuterol sulfate, an inhalation prescription drug used in conjunction with nebulizers. 

BACKGROUND 

Title XVIII of the Social Security Act prescribes coverage requirements under Part B 

of the Medicare program. Part B covered items and services include durable medical 

equipment (DME) as well as certain outpatient prescription drugs. The Health Care 

Financing Administration (HCFA) administers the Medicare program. 

Medicare Coverage of Presaiplion Drugs 

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

are several exceptions to this general rule. These exceptions are detailed in section 

2100.5 of the Medicare Carriers Manual which specifies instances involving covered 

uses of outpatient prescription drugs, including drugs used in conjunction with DME. 

The Manual states that drugs are covered under Part B as long as the drugs are 

necessary for the effective use of the DME. 

A nebulizer is a type of DME through which prescription drugs are administered for 

inhalation therapy. It consists 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. 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. 

In accordance with HCFA policy, if a beneficiary has a severe respiratory illness or 

disease, Medicare will pay for certain inhalation drugs that transform a nebulizer into 

effective therapy for that condition. Medicare guidelines stipulate that the prescribed 

drug must be used to deliver respiratory therapy, and the nebulizer must be the means 

to deliver that therapy. If these conditions are met, Medicare will reimburse both the 

inhalation drug and the nebulizer for as long as the drug is necessary for the effective 

use of the nebulizer. 

According to HCFA Part B data, Medicare allowed amounts for all inhalation drugs 

remained relatively stable during the years 1990 through 1992, never exceeding about 

1

$78 million annually .1 In 1993, allowances increased to about $170 million and rose 

to about $227 million in 1994, an increase of almost 200 percent from 1990. During 

the 14-month period of our review--January 1, 1994 through February 28, 1995--

allowed amounts for inhalation drugs totaled about $269 million. 

Albuterol Sulfate Allowances 

Albuterol sulfate 0.083%, hereafter referred to as albuterol sulfate, is the most


commonly prescribed inhalation drug for nebulizer therapy. Medicare allowances for


albuterol sulfate exceeded $182 million during the 14-month period of our review,


representing 68 percent of total allowances for all nebulizer drugs.


Medicare determines drug allowances based on the lower of estimated acquisition


costs (EAC) or national average wholesale prices (AWP) according to 42 Code of


Federal Regulations 405.517. Resulting allowed amounts are the prices that Medicare


and its beneficiaries pay drug suppliers or pharmacies. If a drug has multiple sources,


like albuterol sulfate, the price is based on the lower of the EAC or the median of


national AWPS for all generic sources. Medicare calculates the median AWP using


Z7ieRed Book or similar sources which list the average wholesale prices


pharmaceutical companies self-report for their products. An EAC is determined


based on surveys of the actual invoice prices suppliers pay for drugs.


Pharmacies or DME suppliers use a drug-specific procedure code, J7620, to claim


Medicare reimbursement for albuterol sulfate. This code identifies the product, but


not the drug manufacturer. Therefore, it does not indicate whether the dispensed


drug is a brand-name drug or generic equivalent.


The HCFA designated four Durable Medical Equipment Regional Carriers


(DMERCS) to process all claims for DME, prosthetics, orthotics, and medical supplies,


including nebulizer drugs. Effective October 1, 1993, the DMERCS replaced local


carriers which had previously processed these claims. Each DMERC determines


allowances for albuterol sulfate in its respective region based on the guidelines stated


in the regulations. During the scope of our review, DMERC allowances for albuterol


sulfate were based on median AWP calculations and ranged from $0.40 to $0.43 per


milliliter (ml). Medicare will also pay drug suppliers a monthly dispensing fee of $5


for each drug in addition to the payment for the drug itself.


This study was conducted as part of Operation Restore Trust, an initiative combining


the forces of multiple agencies to combat Medicare and Medicaid fraud, waste, and


abuse in five States. The five States--California, Florida, Illinois, New York, and


Texas--account for 40 percent of the nation’s Medicare and Medicaid beneficiaries.


10ffice of Inspector General, Medicare Part B - Reimbursement to Providers for 

Drugs Used in Conjunction with Durable Medical Equipment, A-06-92-00079 

(Washington, D.C.: U.S. Department of Health and Human Services, 1995), 3. 

2 
The initiative centers on services provided by DME suppliers in addition to services 

provided by nursing homes, hospices, and home health agencies. 

RelatedWorkbythe OjJiceofInspector General 

This report is one ofaseries of Office of Inspector General (OIG) inspections 

concerning Medicare payments for outpatient prescription drugs in general and 

inhalation drugs in particular. Earlier this year, we released a report entitled Medicare 

Payments for Nebulizer Drugs (OEI-03-94-O0390). We found that Medicaid reimbursed 

albuterol sulfate and other nebulizer drugs at significantly lower prices than Medicare. 

In a related report called A Comparison of Albuterol Su~ate Prices (OEI-03-94-00392), 

we found that many pharmacies, pharmaceutical buying groups and mail-order 

pharmacies charged customers less for generic albuterol sulfate than Medicare’s 

allowed reimbursement. A forthcoming report, Questionable Medicare Payments for 

Nebulizer Drugs (OEI-03-94-00391), examines coverage, utilization, and medical 

necessity issues relating to the use of albuterol sulfate in nebulizers by Medicare 

beneficiaries. 

In an earlier report, Medicare Part B--Reimbursement to Providers for Drugs used in 

Conjunction with Durable Medical Equipment (CIN-A-06-92-OO079), we found that 

HCFA lacked clear legislative authority to cover self-administered outpatient 

prescription drugs. Additionally, we concluded there was no assurance that drugs were 

properly priced and paid because HCFA did not require carriers to obtain detailed 

pricing information. We recommended that 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 

We obtained pertinent background information on inhalation drugs used in nebulizers 

from a wide variety of sources, including HCFA officials, DMERC medical directors 

and utilization review personnel, medical equipment suppliers, and pharmacies. 

Focusing on albuterol sulfate, the inhalation drug most frequently reimbursed under 

Medicare, we selected a stratified random sample of 485 claims for albuterol sulfate 

(procedure code J7620) from a HCFA One Percent DME Claims File. Seven strata 

were designated in the sampling plan: one for each of the five Operation Restore 

Trust States, Puerto Rico, and a strata comprised of J7620 claims from all other 

States. Service dates were confined to the 14-month period of our review, January 1, 

1994 through February 28, 1995. 

We mailed requests for information to the suppliers that billed Medicare for the 485 

sampled albuterol sulfate claims. (In this report, we use the term “supplier” to 

indicate the entity which billed Medicare for providing the nebulizer drug to the 

beneficiary.) These requests covered a variety of subjects, including (1) supplier 

business characteristics, (2) how the supplier obtained and delivered the nebulizer 

3 
drug to the beneficiary, (3) description of the drug provided, and (4) drug 

procurement costs and related drug costs. We asked suppliers to submit copies of 

documents from their files, such as physician prescriptions, invoices showing drug 

procurement costs, and beneficiary medical information, to support each sampled 

J7620 claim. 

Supplier Response Rates 

Suppliers returned completed requests for 418 of the 485 sampled J7620 claims (86 

percent response rate). Some respondents did not, however, submit copies of all of 

the claim-supporting documentation that we requested. We contacted these suppliers 

by telephone and letter to secure missing documentation. After executing this followup plan, we achieved a 47 percent overall response rate for claim-supporting albuterol 

sulfate invoices. However, invoice response rates varied widely by strata. These strata 

response rates are presented in Appendix A. 

Nonreqxmdent and Invoice Cost Analjsex 

As mentioned above, a 47 percent response rate for claim-supporting invoices was 

achieved. To address the potential bias effects that suppliers who did not provide 

albuterol sulfate invoices may have had on our cost estimates, we conducted a chisquare analysis of nonrespondents (a statistical method used to test a hypothesis 

between observed and expected results). Chi-square analysis indicates that there is a 

significant difference between suppliers who provided invoices and those who did not 

provide invoices with respect to asset size. Suppliers in our sample possessing assets 

in excess of $100 million were less likely to submit invoices to support their albuterol 

sulfate claims. The table in Appendix A shows that only 5 percent of claims billed by 

suppliers owning assets over $100 million were supported with invoices. In contrast, 

invoices were submitted for 61 percent of claims billed by suppliers owning assets 

under $100 million. 

Cost estimates were computed based on a sample of claim-supporting invoices for 

albuterol sulfate submitted by supplier respondents. (Cost estimates and associated 

confidence intervals appear in Appendix B.) However, our calculations may 

overestimate average supplier invoice costs. As explained above, there is a 

relationship in our sample between suppliers’ submission of invoices and the size of 

their assets. We believe large suppliers owning assets over $100 million may be able 

to use their market power to negotiate low costs for albuterol sulfate with drug 

manufacturers, wholesale outfits, and pharmacies. 

The overall estimate of average supplier cost for albuterol sulfate was applied to a 

conservative calculation of total albuterol sulfate units reimbursed by Medicare from 

January 1994 through February 1995. These calculations, presented in Appendix C, 

illustrate the magnitude of potential program savings if Medicare allowances for 

albuterol sulfate were based on supplier invoice costs. 

4

This inspection was conducted in accordance with the Quali~ Standards for Inspechons 

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

J 
FINDINGS


MEDICARE’S ALLOWANCES FOR ALBUTEROL SULFATE SUBSTANTIALLY 

EXCEED SUPPLIERS ACQUISITION COSTS FOR THE DRUG. 

� Supplikm are paying an average cost of $0.19 per ml for albuterd sulfate. 

During the period of our review, January 1994 through February 1995, Medicare 

allowed amounts for albuterol sulfate ranged from $0.40 per ml to $0.43 per ml. 

Clearly, nebulizer drug suppliers’ acquisition costs for the drug, averaging $0.19 per ml, 

are significantly lower than Medicare’s AWP-based reimbursements. Medicare 

allowances for albuterol sulfate, based on a median of national AWPS, totaled over 

$182 million for this period. If HCFA had based its reimbursement for albuterol 

sulfate on the average of supplier invoice costs, as collected in our survey, the 

Medicare program could have saved $94 million during the 14-month period of our 

review. (See Appendix C) Determination of prescription drug allowances based on 

EAC--requiring surveys of supplier invoices--is one of the methods presently 

authorized by Medicare reimbursement regulations. 

We estimated an overall average supplier cost for albuterol sulfate of $0.19. 

Respondents submitted three distinct types of claim-supporting invoices for albuterol 

sulfate: manufacturer invoices, wholesale company invoices, and pharmacy invoices. 

These invoices reflect three different purchase sources. Therefore, supplier costs for 

albuterol sulfate varied widely, ranging from a low of $0.12 to a high of $0.41. To 

address this variability, we calculated average supplier cost estimates by invoice type. 

The chart below compares cost estimates per ml for each purchase type to Medicare’s 

lowest reimbursement per ml of albuterol sulfate during the sample period. 

Supplier Costs Compared to 

Medicare Lowest Allowance 

Pri@ml � PurchaaeSource !g#jMefMcare 

$0.50 

$0.40 

$0.30 

$0.20 

$0.10 

$0.00 

Manufacturer Wholesaler Pharmacy 

6

�	 ??%enpudased from a drug manufacture~ the average supplier cost per ml of 

albuterol dfate was $0.14. 

Thirty-two percent of sampled claims were billed by suppliers who purchased generic 

albuterol sulfate from a drug manufacturer. In our sample, suppliers’ costs paid to the 

drug manufacturer ranged from $0.12 to $0.17. Medicare’s lowest allowance per ml 

for albuterol sulfate during the sample time frame was $0.40. This allowed amount is 

almost three times the drug manufacturer invoice price average of $0.14. 

�	 l%e average cost per ml of albuterol sz@ate was $0.20 when suppllenspurchased 

the drug ji-om wholesale companies. 

Twenty-three percent of sampled claims were billed by suppliers purchasing the 

nebulizer drug from wholesalers. While suppliers purchasing from drug 

manufacturers were able to obtain albuterol sulfate at the most advantageous costs, 

those paying wholesale costs were reimbursed by the Medicare program at rates at 

least two times greater than the wholesaler costs estimate. 

�	 Supplkm purchasing albuterol sulfate @m phannucies paid an average cost per ml 

of $0.23. 

Forty-five percent of sampled claims were billed by suppliers who purchased albuterol 

sulfate from pharmacies. These suppliers received Medicare reimbursements at least 

1.8 times greater than the $0.23 pharmacy cost estimate. 

Invoices of this type indicate the cost suppliers pay to a pharmacy, not the cost that 

the pharmacy incurs for the drug. Nebulizer drug suppliers buying albuterol sulfate 

from pharmacies may be paying for not only the drug, but also the cost of related 

services provided by pharmacies. These services may include dispensing, packaging 

and/or shipping the drug to Medicare beneficiaries. Therefore, costs paid by suppliers 

purchasing the drug from pharmacies were less competitive than those paid to 

manufacturers and wholesalers. 

only 43 percent of sample claims were billed by suppliers who provided information 

on their additional costs. Most suppliers did not quantify these other costs per ml of 

albuterol sulfate. Rather, these suppliers listed general types of additional expenses 

including sales, billing and support personnel, respiratory therapists, drivers, 24-hour 

service, home delivery, insurance, and storage. Suppliers also noted expenses such as 

packaging, Iabelling, shipping, and delivexy of the drug. 
�	 Most albuterol @ate bilkd to the Medicare program was the generic form of the 

drug. 

Suppliers submit claims for albuterol sulfate to Medicare under the HCFA Common 

Procedure Coding System code, J7620. Suppliers bill code J7620 whether the 

albuterol sulfate they provided to beneficiaries was brand name or generic in form. 

Our analysis indicates that 90 percent of sampled claims were supported by supplier 

invoices for generic, non-compounded albuterol sulfate. In contrast, only six percent 

of sampled claims were supported by supplier invoices for brand name albuterol 

sulfate. 

The remaining four percent of sampled claims were supported by invoices for the 

ingredients suppliers use to compound albuterol sulfate. Suppliers compound 

albuterol sulfate on an individual basis from prescribed ingredients. We could not 

determine unit cost per ml of albuterol sulfate from the compounding ingredient 

invoices. Therefore, these invoices were not included in the cost analysis. 

8�
RECOMMENDATIONS


The findings of this report indicate that Medicare’s allowances for albuterol sulfate are 

excessive compared to suppliers’ costs for the drug. During the period of our review, 

Medicare reimbursed suppliers at allowed amounts ranging from $0.40 to $0.43 per ml 

of albuterol sulfate. These allowances were based on drug manufacturer AWPS. 

Current HCFA regulations allow Medicare reimbursement to be based on the lower of 

EAC or median AWP. However, HCFA has been unsuccessful in gathering the data 

to determine EAC. 

If the HCFA had based its reimbursement for albuterol sulfate on the average of 

supplier invoice costs, as illustrated in this report, the Medicare program could have 

saved $94 million during the 14-month period of our review. Although we recognize 

that suppliers of albuterol sulfate incur other costs related to inhalation therapy in 

addition to the cost of the drug, we believe current Medicare reimbursements more 

than compensate suppliers for these costs along with a reasonable profit margin. 

We believe our invoice cost analysis further supports a recommendation made in an 

OIG report entitled Medicare Payments for Nebulizer Drugs. We previously 

recommended that HCFA reexamine its Medicare drug reimbursement methodologies 

with the goal of reducing payments as appropriate. 

For our readers’ convenience, we repeat here the options contained in our prior 

report for changing Medicare’s payments for prescription drugs. 

Discounted Wholesale Price 

Many Medicaid 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 

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 

9 
program. Wehavenot thoroughly assessed howa 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 

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 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. A variation of 

this option is to use actual rather than estimated acquisition costs. 

HCFA COMMENTS 

The HCFA concurred with our recommendation to reexamine Medicare’s drug 

reimbursement methodologies with a goal of reducing payments. In exploring new 

strategies for changing Medicare’s payment for prescription drugs, HCFA has 

constructed a framework to calculate drug prices centrally. They have also developed 

a crosswalk between Medicare’s current coding system and the NDCS to enable claims 

processing using the NDC. In addition, HCFA is examining the use of competitive 

bidding for nebulizers and associated drugs under its demonstration authority. 

10

The HCFA agreed with our concerns about invoking the inherent reasonableness 

authority and stated that it appreciated the OIG’S work in this area. The HCFA is 

currently addressing this issue through the regulatory process. The full text of HCFA’S 

comments are presented in Appendix D. 

In a technical comment, HCFA suggested that we review the proportion of albuterol 

sulfate actually obtained through a pharmacy as opposed to a pharmacy selling to a 

DME company who, in turn, sells to the Medicare patient. 

OIG RESPONSE 

We support HCFAS efforts to revise its drug reimbursement mechanisms to more 

appropriately pay for prescription drugs covered under the Medicare program. We 

believe revisions to the current payment methodologies that take into account the 

actual costs of these drugs would provide significant savings to the Medicare program. 

We discussed directly with HCFA staff the data we had available in response to their 

technical comment. 

11

APPENDIX A


NONRESPONDENT ANALYSIS 

An important consideration with respondent-based research is the bias that maybe 

introduced into the results if nonrespondents differ from respondents in systematic 

ways. We achieved an overall response rate for claim-supporting albuterol sulfate 

invoices of only 47 percent. However, as shown in the table below, invoice response 

rates varied widely by strata. 

INVOICE RESPONSE RATES BY STRATA 

strata Population Sample Achieved Sample 

size size Size(Invoices) 

California 603 75 25 

\ 

Florida 1789 75 40 

Illinois 464 75 28 

I I I I 

New York 433 75 31 

Puerto Rico 866 55 46 

Texas 1075 75 36 

Other States 6763 55 24 

TOTAL 11993 485 230 

!1 

Invoice 

Response Rates 

33% 

1

53qo I 

3770 I 

4170 

! 

84?Z0 

48% 

44?Z0 

4770 1 

In order to test for potential bias effects that suppliers who did not provide albuterol 

sulfate invoices may have had on our invoice price estimates, we conducted an analysis 

utilizing National Supplier Clearinghouse (NSC) supplier profile data. The NSC 

processes all supplier number applications and maintains files on these suppliers. 

We inspected NSC data profiling the nebulizer drug suppliers who billed Medicare for 

the 485 albuterol sulfate claims in our sample. We reviewed NSC data fields 

providing information on supplier characteristics such as size and scope of business 

activity. We focused our analysis on suppliers possessing assets over $100 million. 

The Chi-square statistic was used to test for differences between suppliers who 

submitted invoices and suppliers who did not submit invoices with respect to assets. 

A-1

CHI-SQUARE FOR SIZE OF ASSETS 

Invoice Invoice Not Total 9Z0Invoice 

Submitted Submitted Submitted 

Assets >$100 5 (2%) 95 (41%) 100 5% 

million 

Assets <$100 214 (98%) 138 (59%) 352 61% 

million 

Overall 219 233 452 48% 

CHI-SQUARE = 97.06@ Degrees of Freedom = 1 

Chi-square results are presented in the table above. Analysis indicates that our 

invoice price estimates are biased with respect to size of supplier assets. We can 

conclude that there is a relationship in our sample between invoice submission and 

size of assets at the 99% confidence level. 

2A Chi-square statistic of 6.63 or higher indicates that we can reject the null 

hypothesis that the invoice submissions and asset sizes are independent at the 99 

percent confidence level. 

A-2 
APPENDIX B


COST ESTIMATES AND CONFIDENCE INTERVALS 

The tables below contain estimated average supplier costs for albuterol sulfate overall 

and by purchase source. Also provided are estimated proportions of invoices by 

purchase source and drug type. These estimates andtheir corresponding 95 percent 

confidence intervals were computed using standard statistical formulas for a 

single-stage stratified random sample. 

Supplier Cosb for Ailmterol Sulfate 

Overall Mean Estimate 95% Confidence Interval 

$0.194 $0.185-$0.204 

Supplier Cosfi by Invoice l)pe 

Purchase Source Mean 95% Confidence Interwd


Manufacturer $0.139 $0.133-$0.145


Wholesaler $0.203 $0.177-$0.229


Pharmacy $0.227 $0.207-$0.246


Suppller Rdzase Source 

Purchase Source Proportion 95% Confidence Interval 

Manufacturer 32.25% 21.39% - 43.11% 

{1Wholesaler ] 23.25% I 13.63% - 32.88% II 

Pharmacy 44.50% 32.66% - 56.34% 

T@e of Albuterol Sulfate l’+ovided 

Drug Tjrpe Proportion 95% Confidence Interval


Generic 90.02% 82.57% - 97.47%


Brand Name 5.9370 0- 12.10%


Compounded 4.05% O - 8.62%


Other Costi 

Proportion 95% Confidence Interval 

Reported Other Costs 42.80% 32.54% - 53.06% 

B-1

APPENDIX C


CALCULATION OF POTENTIAL MEDICARE SAVINGS 

Analysis of claim-supporting invoices indicates that suppliers are paying an average 

cost of $0.19 per ml for albuterol sulfate. 

During the period of our review, January 1994 through February 1995, Medicare 

allowed amounts for albuterol sulfate ranged from $0.40 per ml to $0.43 per ml. 

Medicare allowances for albuterol sulfate, based on a median of national AWPS, 

totaled over $182 million for this period. If Medicare allowances for albuterol sulfate 

had been based on supplier invoice costs, however, the program could have saved an 

estimated $94 million. 

This savings estimate was calculated by first determining the total Medicare allowance 

for albuterol sulfate during the study period. This figure was obtained from HCFA’S 

National Claims History One Percent File. Total allowed services corresponding to 

the total Medicare allowance were calculated conservatively by dividing the total 

allowance by the lowest reimbursement allowed during this period: $0.40. Total 

allowed services were then multiplied by the overall average supplier cost of $0.194 

per ml of albuterol sulfate. This estimated total Medicare allowance for albuterol 

sulfate was subtracted from the actual total Medicare allowance to derive potential 

savings. The calculation steps are outlined below. 

STEPl 

[[ Actual Total Allowance I LowestReimbursementper ml 

II $182,313,000 

STEP 2 

Estimated Total 

Services 

455,782,500 

STEP 3 

Actual Total Allowance 

$182,313,000 

I I $0.40 

Estimated Mean Supplier Price 

per ml 

x $0.194 

($0.185 - $0.204) 

Estimated Total Allowance 

-$88,421,805 

($84,319,763- $92,979,630) 

I Estimated Total Servkes II 

I = 455,782,500 II 

Estimated Total Allowance 

= $88,421,805 

($84,319,763- $92,979,630) 

Potential Medieare Savings 

= $93,891,195 

($89,333,370- $97,993,237) 

c-1

APPENDIX D 

AGENCY COMMENTS 

D-1 
**

~,.,:..w ,.j . >-Jg-~EPARTMENT OF HEALTH & HUMAN SERVICES : 

: 

s 

3 

~+‘+ .,,.,. >

DATE: 

TO: 

FROM: 

SUBJECT: 

We reviewed 

prescription 

klAY-31996 

June Gibbs Brown 

Administrator 

Bruce C. Vladec @ 

a 

Administrator M 

Health Care financing Administration 

The Administrator 

Washington, D.C. 20201 

_T 

oOffice of Inspector General (OIG) Working Draft Reports: Appropriateness 

of Medicare Prescription Drug Allowance’’(OEI-03 -94-OO42O),“Supplier 

Acquisition Costs for Albuterol Sulfate” (OEI-03-94-00393), “A 

Comparison of Albuterol Sulfate Prices’’(OEI-03 -94-OO392) 

the subject reports concefig Medicare payments for outpatient 

drugs. Our detailed comments on the findings and recommendations are 

attached for your consideration. Thank you for the oppotity to review and comment on 

the reports. 

Attachment 

[G


SAIG


PDIG 

J)IG--AS 

LIC:J3 ~


DIG-01


DJG-MP


)lC.-C7AA


OGQIG


EXSEC


DATE SEXT


3

Health Care Financing Administration (HCFA) Comments on


OffIce of Inspector General (OIG) Working Draft Reports:


“Medictie Prescription Drug Allowances,’’(OEI-03 -94-OO42O),


“Supplier Acquisition Costs for Albuterol Sulfate.”


(OEI-03-94-00393), and “A Comparison of AIbuterol Sulfate Prices,”


(OEI-03-94-00392)


OIG Recommendation 

HCFA should reexamine its Medicare drug reimbursement methodologies, with a goal of 

reducing payments as appropriate. 

HCFA Response 

We concur. HCFA is exarninin g ways to reduce payments for prescription drugs as 

follows: 

Discounted Wholesale Price 

Lnexploring new strategies for changing Medicare’s payment for prescription drugs, we 

have constructed a framework to calculate drug prices centrally. Also, we are developing 

a crosswalk between the current HCFA Common Procedure Coding Systems and the 

National Drug Code (NDC) to process chims using the NDC. 

Manufacturer’s Rebates 

While the Administration included a rebate mechanism in its proposed Medicare drug 

benefit in the Health Care Reform legislation, it is not an option that HCFA is cwrently 

considering. 

Competitive Bidding 

HCFA is exploring the use of competitive bidding for nebulizers and associate drugs 

under its demonstration authority. 

Lnherent Reasonableness 

We agree and appreciate OIG’S work in this area. HCFA is addressing this issue through 

the regulatory process. This process has a comment period; therefore, it requires time to 

implement. 
Page 2 

Acquisition Cost 

This option involves lowering drug payments by basing them on the estimated acquisition 

cost. A 1994 survey attempt was made by HCFA to collect the necessary data to fully 

implement current regulations. The survey was not approved by the Office of 

Management and Budget because it was found to be too burdensome to pursue due to the 

large number of physicians and drugs involved. 

Technical Comment 

We suggest OIG review the proportion of albuterol actually obtained through a pharmacy, 

as opposed to a pharmacy selling to a durable medical equipment provider who in turn 

sells to the Medicare patient.