Department of Health and Human Services


OFFICE OF 

INSPECTOR GENERAL 

REVIEW OF SERVICES PROVIDED


BY INHALATION DRUG 


SUPPLIERS


Daniel R. Levinson


Inspector General 


September 2005


OEI-01-05-00090

Office of Inspector General 
 http://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 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 HHS. 

Office of Evaluation and Inspections 

The Office of Evaluation and Inspections (OEI) conducts management and program 

evaluations (called inspections) that focus on issues of concern to HHS, Congress, and 

the public. The findings and recommendations contained in the inspections generate 

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

effectiveness of departmental programs. OEI also oversees State Medicaid Fraud 

Control units which investigate and prosecute fraud and patient abuse in the Medicaid 

program. 

Office of Investigations 

The 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. 

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. OCIG imposes program exclusions and civil 

monetary penalties on health care providers and litigates those actions within HHS. 

OCIG also represents OIG in the global settlement of cases arising under the Civil False 

Claims Act, develops and monitors corporate integrity agreements, develops compliance 

program guidances, renders advisory opinions on OIG sanctions to the health care 

community, and issues fraud alerts and other industry guidance. 
Δ EXECUTIVE SUMMAR Y 

OBJECTIVE 

To determine the nature and extent of dispensing services that 

Medicare beneficiaries receive from inhalation drug suppliers. 

BACKGROUND 

In 2003, about 1 million beneficiaries received Medicare-covered 

inhalation drugs. Medicare paid suppliers about $1.4 billion for the 

drugs and an additional $35.5 million in dispensing fees. In 2005, 

reductions in payments for inhalation drugs mandated by the Medicare 

Prescription Drug, Improvement, and Modernization Act of 2003 took 

effect. This resulted in up to a 90 percent drop in payment for some of 

these drugs from their 2003 level. To cover the cost of services 

necessary to dispense inhalation drugs, the Centers for Medicare & 

Medicaid Services (CMS) raised the dispensing fee from $5 to $57 for a 

30-day drug supply and offered $80 for a 90-day supply. We estimate 

that payments for dispensing fees will total about $400 million in 2005. 

Yet, it is unclear what services suppliers provide and, therefore, how 

much Medicare should pay in its dispensing fee. While the Medicare 

Program Integrity Manual requires suppliers to contact beneficiaries 

before providing drug refills, neither Congress nor CMS has stated what 

additional services the dispensing fee covers. In its 2004 final rule 

setting the interim fee, CMS stated the need to learn more about the 

services inhalation drug suppliers provide to Medicare beneficiaries. 

We drew a stratified random sample of 480 beneficiaries who had 

Medicare claims for inhalation drugs in 2003. We mailed surveys to the 

203 suppliers who provided these beneficiaries with their drugs and 

requested that the suppliers report and provide supporting 

documentation for all services they provided to the beneficiaries during 

2003. We received responses for 96 percent of the beneficiaries in our 

sample, yielding data on 11,777 services. We excluded undocumented 

services and others outside of the scope of this inspection, such as drug 

deliveries and billing activities. Our analysis considered 4,130 services. 

FINDINGS 

The most common service beneficiaries received in 2003 was 

contact for drug refills. Sixty percent of beneficiaries received this 

service at least once in 2003. Thirty-one percent of beneficiaries who 

should have been contacted for a refill were not contacted by their 

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EXE CUTIVE S CUTIVE S U MMAR Y

suppliers, contrary to the Medicare Program Integrity Manual. 

Suppliers contacted physicians’ offices for about half of beneficiaries to 

get physicians’ orders, consult on medication changes, and for other 

reasons. Less than a third of beneficiaries had their medication 

compliance reviewed by their suppliers. Few beneficiaries received 

more intensive services such as education, response to an inquiry, care 

plan revision, or respiratory assessment. Among beneficiaries who had 

2 months or more of drug claims, 16 percent received no services at all. 

Other services were less common. Contact for drug refills accounted 

for 56 percent of services. The next most common services, medication 

compliance reviews and contacting physicians’ offices, composed 

15 percent and 12 percent of services, respectively. 

The most common way beneficiaries received services was by 

telephone. Beneficiaries received 73 percent of services by telephone. 

Fourteen percent of services involved no supplier contact with 

beneficiaries. Home visits were rare; only about 1 in 10 beneficiaries 

received a home visit any time during 2003. 

Beneficiaries were three times more likely to receive a service 

beyond a refill contact if their supplier also provided their 

respiratory equipment. When beneficiaries’ inhalation drug suppliers 

also provided them with Medicare-covered respiratory equipment, those 

beneficiaries were far more likely to receive services beyond a refill 

contact. Those beneficiaries’ average monthly service level was higher 

than that of beneficiaries who only received inhalation drugs from their 

suppliers. 

Service levels dropped off after the first month suppliers billed for 

drugs. On average, services beneficiaries received fell from 

1.96 services in the first month suppliers billed for drugs to between 

1.01 and 1.18 services in the second through eighth months of service. 

CONCLUSION 

CMS set the interim dispensing fee for inhalation drugs based, in part, 

on an assumption that beneficiaries receive numerous, important 

services from their drug suppliers. This inspection shows that 

beneficiaries, on average, receive little service from their inhalation 

drug suppliers beyond contacting them to ask if they need a drug refill. 

We provide this information to CMS to assist it in setting a new 

dispensing fee for inhalation drugs. 

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EXE CUTIVE S U MMAR Y

AGENCY COMMENTS 

In its comments on the draft report, CMS expressed appreciation for the 

Office of Inspector General’s efforts to provide information on services 

that inhalation drug suppliers provide to Medicare beneficiaries. CMS 

stated that it will carefully consider this information as it develops a 

new dispensing fee policy. 

OFFICE OF INSPECTOR GENERAL RESPONSE 

We appreciate CMS’s comments and consideration of the information in 

the report. 

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 i 

Δ T ABLE OF CONTENTS 

EXECUTIVE SUMMARY . . . . . ... ... ... . ... ... ... . ... ... ... . .

INTR O D U C T I ON ........................................... 1

FINDI NGS ................................................. 5

Most services were drug refill contacts ...................... 5

Other services were far less common ........................ 6

Most services were provided by telephone .................... 6

Beneficiaries receiving equipment more likely to get services .... 7

Service levels dropped off after the first month................ 7

CON C L U SION ............................................. 9

ENDN OTE S ............................................... 10

APPENDIXES ............................................. 13

A: Methodology........................................ 13

B: Data Tables ........................................ 20

C: Nonrespondent Analysis .............................. 24

AGEN CY COMME N T S ..................................... 26

ACKN O W LEDGMENTS .................................... 27
ΔINTROD UCT ION

 INTRODU C TION 

OBJECTIVE 

To determine the nature and extent of dispensing services that 

Medicare beneficiaries receive from inhalation drug suppliers. 

BACKGROUND 

Medicare Coverage of Inhalation Drugs 

About 1 million beneficiaries received Medicare-covered inhalation 

drugs in 2003. These drugs, such as albuterol sulfate and ipratropium 

bromide, help beneficiaries to ease shortness of breath caused by 

emphysema, chronic bronchitis, and other ailments collectively known 

as chronic obstructive pulmonary disease. Because this is an incurable, 

progressive disease, long term use of inhalation drugs is often required.1 

Until full implementation of Medicare Part D in 2006 as part of the 

Medicare Prescription Drug, Improvement, and Modernization Act of 

2003 (MMA), Medicare benefits typically do not cover outpatient 

prescription drugs. However, Medicare does pay for drugs that are 

necessary for the effective use of covered durable medical equipment 

(DME). In this case, Medicare covers inhalation drugs because it covers 

a type of DME called a nebulizer, which beneficiaries use in home-care 

settings to administer the drugs. Nebulizers aerosolize medications so 

that patients can inhale them into their lungs. 

Under the DME benefit, Medicare coverage of nebulizers includes the 

cost of renting/purchasing the equipment, delivering it to beneficiaries, 

and educating beneficiaries in its proper use and maintenance. 

Medicare regulations require that DME suppliers document proof of 

delivery and that they or another qualified party provide beneficiaries 

with the necessary information and instructions on how to use 

Medicare-covered items safely and effectively.2 Medicare pays suppliers 

separately for the inhalation drugs used with the nebulizer and a 

separate drug dispensing fee. 

Medicare Reimbursement for Inhalation Drugs 

In 2003, Medicare payments to suppliers totaled $1.4 billion for 

inhalation drugs and, under a fee structure of $5 per month per drug 

dispensed, $35.5 million in dispensing fees. 

About one-quarter of the suppliers that billed Medicare for inhalation 

drugs in 2003 also billed the program for nebulizers, oxygen equipment, 

and respiratory supplies. These suppliers received several streams of 

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INTROD UCT ION

Medicare payment for each beneficiary they serviced, enabling them to 

achieve economies of scale in their service delivery, for example, by 

attending to both equipment and drug issues during one service call. 

Reduction in Medicare Reimbursement for Inhalation Drugs 

In 2005, MMA-mandated reductions in reimbursement for inhalation 

drugs took full effect, resulting in cuts of up to 90 percent for some of 

these drugs from their 2003 payment level.3 This change followed 

numerous studies by the Office of Inspector General (OIG) and the 

Government Accountability Office (GAO) that found Medicare’s 

payment for inhalation drugs was up to five times suppliers’ acquisition 

cost, far exceeding the payment rate of Medicaid and others.4 In 2002 

alone, Medicare overpaid suppliers nearly $650 million for albuterol 

sulfate and ipratropium bromide, the two most commonly used 

inhalation drugs. Of this amount, about $130 million, or 20 percent, 

was paid by Medicare beneficiaries through copayments.5 

Suppliers contend that the difference between their acquisition costs 

and Medicare payment helps them provide important services to 

beneficiaries, in addition to providing their inhalation drugs. A 2004 

report written for the American Association for Homecare (AAH) stated 

that suppliers commit significant resources to compliance monitoring, 

beneficiary/caregiver education, care plan management, and other 

services. It also stated that suppliers spend 23 minutes on average per 

patient, per month conducting home visits. The report estimated that 

these services compose over 60 percent of the monthly cost of providing 

inhalation drugs.6 

Interim Dispensing Fee 

Because it was concerned that lower, MMA-mandated drug payments 

would not cover suppliers’ cost of furnishing inhalation drugs, CMS 

raised the dispensing fee on an interim basis for 2005.7 Under the 

interim fee, payment for providing a 30-day drug supply increased from 

$5 to $57. CMS also offered to pay suppliers $80 for providing a 90-day 

drug supply.8 Under these two fee structures, we estimate dispensing 

fees for inhalation drugs will total about $400 million in 2005.9 To 

calculate the interim dispensing fee, CMS relied largely on the services 

and costs described in the AAH report, but excluded sales and 

marketing expenses, bad debt, and an explicit profit margin.10, 11 

Uncertainty Over Services Provided 

Yet, it is unclear what services suppliers provide when furnishing 

inhalation drugs, and, therefore, how much Medicare should pay in its 

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INTROD UCT ION 

dispensing fee. An October 2004 GAO report found that suppliers’ 

services varied widely and that their dispensing costs ranged from 

$7 to $204 per month. GAO also found that some costs reported by 

suppliers might not be necessary to dispense drugs, such as overnight 

shipping costs.12 

CMS established the dispensing fee in January 1994.13 Since then, 

neither Congress nor CMS has provided guidance in either statute, 

regulation, or program memorandum concerning what services the 

dispensing fee should cover. However, the Medicare Program Integrity 

Manual does require that suppliers contact beneficiaries prior to 

dispensing refills.14 

New Dispensing Fee for 2006 

In August 2005, CMS published a proposed rule stating its intention to 

set a new dispensing fee for 2006. Pursuant to the proposed rule, the 

fee should be “. . . adequate to cover the costs of those services that 

appropriately fall within the scope of a dispensing fee . . . .” To that end, 

CMS requested “. . . data and information on the various services 

inhalation drug suppliers are currently providing to Medicare 

beneficiaries . . . .”15 

METHODOLOGY 

We based this inspection on a review of services provided by inhalation 

drug suppliers to a stratified random sample of Medicare beneficiaries. 

Scope 

This inspection is national in scope and focuses on customer service 

activities that inhalation drug suppliers provide to Medicare 

beneficiaries. This inquiry does not estimate the cost of providing these 

services, nor does it imply an appropriate level or composition of 

services. This inquiry does not address pharmacy, delivery, billing, and 

other activities that suppliers perform to provide drugs and that also 

drive their cost of doing business. We excluded these activities because 

they must take place for suppliers to provide drugs and get reimbursed. 

We also excluded services related to equipment because Medicare pays 

suppliers separately for equipment and equipment-related services. 

Our analysis of services considered only those services that suppliers 

could support with documentation. 

Sample Selection 

We based our findings on a review of services provided by inhalation 

drug suppliers to a stratified random sample of 480 Medicare 

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INTROD UCT ION 

beneficiaries who had paid claims for inhalation drugs in Medicare’s 

National Claims History File in calendar year 2003. Our sample 

population comprises 966,966 beneficiaries. We stratified our sample to 

enable us to test for differences related to longevity on the drugs and 

oxygen use. This approach resulted in 4 strata of 120 beneficiaries 

each. Our analysis showed that oxygen use does not affect service 

levels, and we do not report on it in our findings. See Table 1 in 

Appendix A for the strata definitions and sample design. 

Data Collection 

To determine the services provided to beneficiaries in our sample, we 

surveyed the suppliers that provided them with inhalation drugs during 

2003. We requested that suppliers report all services they provided to 

the beneficiaries during 2003 and provide documentation supporting 

each service. We received responses from 186 of the 203 suppliers we 

surveyed. These suppliers provided data on 461 of the 480 beneficiaries 

in our sample, yielding a 96 percent response rate. 

Data Analysis 

We captured data on a total of 11,777 services, including 500 services 

that suppliers failed to report but were evident in supporting 

documentation. Of these, we excluded 5,097 services related to drug 

delivery, billing, and pharmacy because they were outside of the scope 

of our inquiry and 441 equipment-related services. We eliminated 

1,505 services that suppliers could not support with documentation.16 

We also excluded 181 unsuccessful service attempts because no service 

was provided, 344 duplicate reports of services, 68 services related to 

drugs not covered by Medicare, and 11 services for other reasons. After 

these exclusions, the total number of services in our analysis was 4,130. 

See Appendix A for a full discussion of our methodology. 

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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ΔF I NDING S 

 FINDINGS 

The most common service beneficiaries Sixty percent of beneficiaries 

received this service at least once in 

2003. This service involved 

salespeople, respiratory therapists, or other supplier staff contacting 

beneficiaries to ask if they need a new monthly supply of medication 

(beneficiaries sometimes initiate this contact as well). Occasionally, 

beneficiaries would request refills by sending preprinted postcards to 

their suppliers. 

received in 2003 was contact for drug refills 

Among beneficiaries with 2 months or more of drug claims in 2003, 

31 percent had no refill contacts during the entire year. Pursuant to the 

Medicare Program Integrity Manual, these beneficiaries should have 

been contacted at least once by their suppliers that year. 

Suppliers contacted physicians’ offices for about half of beneficiaries 

Fifty-two percent of beneficiaries received this service in 2003. 

Suppliers contacted physicians’ offices to get physicians’ orders, to 

consult on medication changes, and for other reasons. The Medicare 

Program Integrity Manual requires that suppliers get a physician’s 

order before billing for inhalation drugs.17 Fifty percent of these 

contacts occurred in the first month that suppliers billed for drugs; the 

contacts dropped off significantly in subsequent months.18 

Less than a third of beneficiaries had their medication compliance reviewed 

by their suppliers 

Twenty-seven percent of beneficiaries received a compliance review 

from their supplier at least once in 2003. Supplier staff conducted 

compliance reviews to determine whether beneficiaries were using their 

medication in accordance with the instructions of their physicians. 

Compliance reviews ranged from those using a telephone call script 

with questions on the beneficiary’s drug use, side effects, and outcomes, 

to reviews that consisted of a note made in a refill call log stating how 

often the beneficiary used the drugs (e.g., “using as needed”). 

Eighty-nine percent of all compliance reviews occurred while supplier 

staff were calling beneficiaries to ask if they needed a drug refill. 

Few beneficiaries received more intensive services such as education, 

response to an inquiry, care plan revision, or respiratory assessment 

Sixteen percent of beneficiaries received an educational service from 

their supplier at least once in 2003. Educational services included 

printed fact sheets on the prescribed drugs, printed information about 

the supplier, and training on how to use the drugs. Eight percent of 

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F I NDING S 

beneficiaries made an inquiry to their suppliers during the year, 

typically by telephone. Inquiries included requests for emergency refills 

and reporting problems with medications. Five percent of beneficiaries 

received care plan revisions and less than 3 percent received respiratory 

assessments. Care plan revisions involved changing beneficiaries’ 

medication or frequency of use. To conduct respiratory assessments, 

supplier staff visited beneficiaries in their homes to check clinical 

indicators of breathing functions. See Table 6 in Appendix B for the 

percentage of beneficiaries who received different services. 

Sixteen percent of beneficiaries received no services at all 

Because some beneficiaries were beginning or ending their treatment 

regimens outside of 2003, we do not expect that all of them would have 

received a service during the year. However, among beneficiaries with 

2 months or more of drug claims in 2003, 16 percent received no services 

at all during the entire year. 

Other services were far less common Of all services provided in 2003, 

56 percent were refill contacts. 

With 15 percent of services, medication compliance reviews were the 

second most common service beneficiaries received. Contacting 

physicians’ offices composed 12 percent of services. The next most 

common service was beneficiary/caregiver education at 7 percent of 

services, followed by clinical intake, which composed 4 percent of 

services. Two percent of services were responding to beneficiary 

inquiries. Other services, including respiratory assessments and care 

plan revisions, together composed about 5 percent of services. See 

Table 7 in Appendix B for a list and frequency count of services. 

The most common way beneficiaries received Beneficiaries received 73 percent of 

services by telephone in 2003. 

Contacting beneficiaries for a refill 

and medication compliance reviews, the two most frequent services, 

were performed almost entirely by telephone. Fourteen percent of 

services involved contacting physicians’ offices and other activities that 

required no beneficiary interaction. Service delivery methods also 

included U.S. mail, third-party delivery services such as FedEx, and 

in-person at retail locations. See Table 8 in Appendix B for a list and 

frequency count of service delivery methods. 

services was by telephone 

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F I NDING S 

Home visits were rare 

Only about 1 in 10 beneficiaries received a home visit from their 

suppliers at least once in 2003. These visits involved supplier delivery 

people or other staff visiting beneficiaries in their homes to perform 

services such as education and respiratory assessments. About 

2 percent of all services were provided by home visits. See Table 9 in 

Appendix B for the percentage of beneficiaries who received different 

service delivery methods. 

Beneficiaries were three times more likely to 

receive a service beyond a refill contact if their 

supplier also provided their respiratory 

equipment 

When beneficaries’ inhalation drug 

suppliers also provided them with 

their nebulizers, oxygen equipment, 

or other Medicare-covered 

respiratory equipment, those 

beneficiaries were far more likely to receive services beyond a refill 

contact.19 Also, those beneficiaries’ average service level was higher 

than that of beneficiaries who only received inhalation drugs from their 

suppliers.20 Seventy-four percent of beneficiaries receiving inhalation 

drugs also got Medicare-covered respiratory equipment or supplies from 

their drug suppliers. 

Service levels dropped off after the first month Services fell from 1.96 services in 

the first month that suppliers billed 

for drugs to between 1.01 and

suppliers billed for drugs 

1.18 services in the second through eighth months of service.21 (See 

Chart 1 on page 8.) On average, beneficiaries received 1.2 services per 

month throughout 2003.22 Excluding contacts for drug refills, this 

service level fell to 0.71 services per month. 

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F I NDING S 

Chart 1: Average 

Number of 

Services per Month 

Received by 

Medicare 

Beneficiaries from 

Inhalation Drug 

Suppliers During 

2003, by Month of 

Service 

Average All Services 

2.5 

2 

1.5 

1 

0.5 

0 

1 2 3 4 5 6 7 8 

Claim Month 

Source: Office of Inspector General Survey of Inhalation Drug Suppliers, 2005. 

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Δ CONCLUSION 

For 2005, CMS set a revised, interim dispensing fee for inhalation drugs 

in response to significant cuts in drug payments mandated by the MMA. 

The fee is to remain in place while CMS gathers more information on 

the services that drug suppliers provide to Medicare beneficiaries. CMS 

plans to set a new dispensing fee for 2006. 

To set the interim fee, CMS relied primarily on a report commissioned 

by AAH, a trade group representing the respiratory therapy industry. 

The report stated that, in addition to providing drugs, inhalation drug 

suppliers provide numerous, important services to Medicare 

beneficiaries. According to the report, services such as home visits, 

compliance monitoring, beneficiary/caregiver education, and care plan 

management compose 60 percent or more of the monthly cost of 

servicing each beneficiary. 

CMS set the interim dispensing fee for inhalation drugs based, in part, 

on an assumption that beneficiaries receive these services from their 

drug suppliers. However, this inspection shows that beneficiaries, on 

average, receive little service from their inhalation drug suppliers 

beyond contacting them to ask if they need a refill. 

We provide this information to CMS to assist it in setting a new 

dispensing fee for inhalation drugs. 

AGENCY COMMENTS 

In its comments on the draft report, CMS expressed appreciation for the 

OIG’s efforts to provide information on services that inhalation drug 

suppliers provide to Medicare beneficiaries. CMS stated that it will 

carefully consider this information as it develops a new dispensing fee 

policy. For CMS’s complete comments, see page 26 of this report. 

OFFICE OF INSPECTOR GENERAL RESPONSE 

We appreciate CMS’s comments and consideration of the information in 

the report. 

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Δ ENDNOTE S 

1 Global Strategy for Diagnosis, Management, and Prevention of 

Chronic Obstructive Pulmonary Disease, Executive Summary based on 

April 1998 National Heart, Lung, and Blood Institute/World Health 

Organization workshop. Global Initiative for Chronic Obstructive 

Pulmonary Disease, updated 2004. 

2 42 C.F.R. § 424.57(c)(12) (2003). 

3 Medicare now pays for inhalation drugs at 106 percent of the average 

sales price. The average sales price reflects the actual average price at 

which manufacturers sell inhalation drugs. 

4 See:

 Department of Health and Human Services, Office of Inspector 

General, Update: Excessive Medicare Reimbursement for Albuterol, 

OEI-03-03-00510, January 2004. 

 Department of Health and Human Services, Office of Inspector 

General, Update: Excessive Medicare Reimbursement for Ipratropium 

Bromide, OEI-03-03-00520, January 2004. 

 Government Accountability Office, Payments for Covered Outpatient 

Drugs Exceed Providers’ Cost, GAO-01-1118, September 2001. 

5 Department of Health and Human Services, Office of Inspector 

General, Update: Excessive Medicare Reimbursement for Albuterol, 

OEI-03-03-00510, January 2004. 

 Department of Health and Human Services, Office of Inspector 

General, Update: Excessive Medicare Reimbursement for Ipratropium 

Bromide, OEI-03-03-00520, January 2004. 

6 Muse & Associates, The Costs of Delivering Inhalation Drug Services 

to Medicare Beneficiaries, August 2004. 

7 69 Fed. Reg. 47,549 (August 5, 2004). 

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8 69 Fed. Reg. 66,338 (November 15, 2004). 

9 We base this estimate on about 7,100,00 dispensing fees paid in 2003 

at a blend of the 2005 interim amounts of $57 and $80. 

10 70 Fed. Reg. 45,848 (August 8, 2005). 

11 69 Fed. Reg. 66,338 (November 15, 2004). 

12 Government Accountability Office, Appropriate Dispensing Fee 

Needed for Suppliers of Inhalation Therapy Drugs, GAO-05-72, 

October 2004. 

13 Authority for a dispensing fee for inhalation drugs is based on 

§ 1842(o)(2) of the Social Security Act which reads, “If payment for a drug 

or biological is made to a licensed pharmacy approved to dispense drugs 

or biologics under this part, the Secretary may pay a dispensing fee (less 

the applicable deductible and coinsurance amounts) to the pharmacy.” 

14 Medicare Program Integrity Manual Rev. 71, 04-09-04 § 4.26.1. 

15 70 Fed. Reg. 45,848 (August 8, 2005). 

16 Of these, about half were medication compliance reviews and about a 

third were contacts for drug refills. 

17 Medicare Program Integrity Manual Rev. 100, 01-21-05 § 5.1.1. 

18 The average decrease in physician contacts from month 1 to 

months 2 through 8 was 0.61, with p<.01. 

19 We performed logistic regression to determine the relationship 

between beneficiaries receiving respiratory equipment from their 

inhalation drug suppliers and receiving a service beyond a refill contact. 

The regression determined that, compared to beneficiaries receiving only 

drugs from their suppliers, beneficiaries receiving equipment were 

3.14 times more likely to receive a service beyond a refill contact. This 

effect is statistically significant at p<.05; the upper and lower 

95 percent confidence intervals are 1.73 and 5.70, respectively. 

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20 Beneficiaries who also received Medicare-covered respiratory 

equipment and supplies received 1.31 services per month on average. 

Beneficiaries who only received inhalation drugs from their supplier 

received 0.83 services per month, on average. A statistical test of 

differences shows that the difference between these means is statistically 

significant with t=3.25 and p<.01. 

21 The average decrease in services from month 1 to months 2 through 

8 was 0.93, with p<.01. 

22 Including undocumented services reported by suppliers, this service 

level is 1.59 services per month. 

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APP E N D I X ~ A 

METHODOLOGY 

We based this inspection on a review of services provided by inhalation 

drug suppliers to a stratified random sample of Medicare beneficiaries. 

Scope 

This inspection is national in scope and focuses on customer service 

activities that inhalation drug suppliers provide to Medicare 

beneficiaries. This inquiry does not estimate the cost of providing these 

services, nor does it imply an appropriate level or composition of 

services. This inquiry does not address pharmacy, delivery, billing, and 

other activities that suppliers perform to provide drugs and that also 

drive their cost of doing business. We excluded these activities because 

they must take place for suppliers to provide drugs and get reimbursed. 

We also excluded services related to equipment because Medicare pays 

suppliers separately for equipment and equipment-related services. 

Our analysis considered only those services that suppliers could support 

with documentation from patient records and other sources. See 

Table 6 in Appendix B for the list of services we included in our 

analysis. 

Sample Selection 

We based our findings on a review of services provided by inhalation 

drug suppliers to a stratified random sample of 480 Medicare 

beneficiaries who had Medicare-paid claims for inhalation drugs in 

calendar year 2003. We chose 2003 as our reference year because it was 

the latest year with complete and available Medicare claims data when 

we drew our sample. We excluded Medicare beneficiaries from Puerto 

Rico and U.S. territories. We used CMS’s year 2003 100 percent 

National Claims History file to identify beneficiaries who had paid 

Medicare claims for 1 of 32 inhalation drugs covered for use in a 

nebulizer. Our sample population comprises 966,966 beneficiaries. 

We stratified our sample to determine if beneficiaries beginning 

inhalation drug use and those who use oxygen receive different amounts 

or types of services. 

o Stratum 1: Beneficiaries who began using inhalation drugs in 2003 

and had 8 or more months of drug claims during the year from the 

same supplier and were not using oxygen. 

o Stratum 2: All other beneficiaries who had a claim for inhalation 

drugs in 2003 and were not using oxygen. 

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APP E N D I X ~ A 

o Stratum 3: Beneficiaries who began using inhalation drugs in 2003 

and had 8 or more months of drug claims during the year from the 

same supplier and were using oxygen. 

o Stratum 4: All other beneficiaries who had a claim for inhalation 

drugs in 2003 and were using oxygen. 

Our analysis showed that oxygen use does not affect service levels, and 

we do not report on it in our findings. 

To identify which stratum members of our sample population belonged 

to, we used CMS’s Enrollment Data Base and 2002 - 2003 100 percent 

National Claims History files. See Table 1 for more information on the 

strata populations. 

Table 1: Population and Response Rate for OIG Survey of Inhalation 

Drug Suppliers, by Strata 

Strata N (Population) n (Sample) Number of 

Cases Received 

Percent of 

Cases Received 

Stratum 1

Stratum 2 

Stratum 3

Stratum 4 

13,827 

473,867 

13,918 

465,354 

120 

120 

120 

120 

118 

119 

113 

111 

98 

99 

94 

93 

Overall Total 966,966 480 461 96 

Data Collection Instrument 

Drawing on work by GAO, private researchers, CMS staff, and other 

research, we developed a list of possible services that suppliers might 

provide to beneficiaries and the ways they might interact with 

beneficiaries in doing so. (See Table 2 on page 15.) 

Next, we incorporated our lists of service types and interaction types 

into a 1-page data collection form. We designed the form to be 

photocopied and completed by suppliers for each service they provided 

to beneficiaries in our sample during 2003. The form captured the date 

suppliers provided the service, the type of service provided, how 

suppliers interacted with the beneficiary to provide the service, and 

whether documentation to support the service was attached. We vetted 

the form within OIG and with staff at CMS. 

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APP E N D I X ~ A 

Table 2: Service and Interaction Types 

Service Types Interaction Types 

Reviewed Medication Compliance 

Contacted Patient's Physician 

Compounded Drugs 

Delivered Supply of Drugs 

Responded to Patient Inquiry About Drugs 

Responded to Patient Inquiry About Equipment 

Performed Equipment Maintenance 

Performed Patient Education 

Other Service 

Revised Plan of Care 

Performed Clinical Intake 

Contacted Patient for a Refill 

By Company Staff Visiting in Patient's Home 

By U.S. Postal Service 

By a Delivery Service (e.g., FedEx) 

By Company Delivery Person 

By Telephone 

In Person at Retail Location 

No Interaction 

Other Interaction 

Data Collection 

To determine the services suppliers provided to beneficiaries in our 

sample, we contacted the suppliers that provided them with inhalation 

drugs in 2003. For beneficiaries in Strata 2 and 4, we contacted every 

supplier the beneficiaries had during the year. For each beneficiary in 

Strata 1 and 3, we only contacted the supplier that provided that 

beneficiary with 8 or more months of inhalation drugs. Using this 

approach, we identified 203 suppliers that were associated with the 

beneficiaries in our sample. 

To conduct our survey, we sent each supplier via express delivery a 

packet with a cover letter, a supplier information form, a beneficiary 

roster, instructions, and at least one copy of the data collection 

instrument. Our instructions asked that suppliers report and document 

all services they provided during 2003 to the beneficiaries on the roster. 

We attempted to contact suppliers three times in writing over 8 weeks. 

We also attempted to contact unresponsive suppliers by telephone. We 

received responses from 186 suppliers. These suppliers provided data 

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APP E N D I X ~ A 

on 461 out of the 480 beneficiaries in our sample, yielding a 96 percent 

response rate. (See Table 1 on page 14.) See Appendix C for a 

nonrespondent analysis. 

Data Analysis 

We reviewed each completed form and the corresponding supporting 

documentation suppliers submitted to attempt to verify the service the 

supplier provided and how the supplier interacted with the beneficiary. 

We captured data on 11,777 services, including 500 services that 

suppliers failed to report to us but were evident in the supporting 

documentation for other services. During data entry, we added 

13 additional service types and 2 additional interaction types to 

categorize information suppliers reported to us. About 1,800 services 

fell into these additional categories. See Table 3 below for detail on how 

we defined service delivery methods and Table 4 on page 17 for how we 

defined services. 

Table 3: Definitions of Service Delivery Methods 

Service Delivery Methods Definition 

By U.S. Postal Service 

By a Delivery Service 

By Company Delivery Person 

By Telephone Contact 

By Company Staff Visiting in Patient's Home 

In Person at Retail Location 

No Interaction 

Left Message/Voicemail* 

Telephone/No Answer* 

Other 

Supplier telephoned beneficiary and received no answer or voicemail 

Supplier telephoned beneficiary and left a message 

Supplier reported a service delivery type that does not fit in these categories 

U.S. mail 

Third-party delivery service (e.g., FedEx, United Parcel Service) 

Driver/delivery person employed by drug supplier 

Supplier spoke with beneficiary or caregiver by telephone 

Supplier did not interact with beneficiary or caregiver 

Beneficiary or caregiver went to retail pharmacy 

Supplier staff travel to and work inside beneficiary's home 

* Service delivery methods excluded from our analysis. 

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APP E N D I X ~ A 

Table 4: Definitions of Services 

Service Definition 

Delivered Supply of Drugs* 

Responded to Patient Inquiry About 

Drugs 

Responded to Patient Inquiry About 

Equipment* 

Performed Equipment Maintenance* 

Performed Patient Education 

Clinical Intake 

Reviewed Medication Compliance 

Contacted Patient for a Refill 

Contacted Physician's Office 

Revised Plan of Care 

Compounded Drugs* 

Billing Activity* 

Patient Education about Equipment* 

Delivered Equipment* 

Respiratory Assessment 

Quality Control/Quality Assurance* 

Notified Patient of Impending Delivery 

Patient Tracking 

Internal Order Processing* 

Pharmacist Filled/Dispensed* 

Stat Dose 

Other Service 

Supplier asked beneficiary or caregiver how often beneficiary is using drugs and/or about 

effectiveness, side effects 

Supplier captured beneficiary's demographic and/or clinical information 

Supplier educated beneficiary or caregiver about drugs 

Supplier processed drug order (e.g., sent order from call center to pharmacy) 

Pharmacist mixed two or more drugs together into single vial, or mixed drug from powder 

Changed beneficiary's medication or frequency of use 

Supplier contacted physician's office for prescription, doctor's order, etc. 

Supplier corresponded with beneficiary or caregiver to determine if beneficiary needed a refill 

shipment of drugs 

Supplier performed clinical assessment of beneficiary's respiratory functions 

Supplier delivered nebulizer, oxygen, or respiratory equipment to beneficiary 

Medicare billing activity (e.g., verified insurance, mailed assignment of benefits form) 

Pharmacy-related work needed to fill order 

Supplier changed beneficiary mailing address due to vacation, beneficiary moving; supplier 

terminated service 

Supplier contacted beneficiary or caregiver to confirm delivery date 

Supplier staff verified drug order, tested drug batch, etc. 

Supplier provided the beneficiary with nebulizer drugs 

Beneficiary or caregiver contacted the supplier with a drug-related question and the supplier 

answered it 

Beneficiary or caregiver contacted the supplier with an equipment-related question and the 

supplier answered it 

The supplier performed maintenance on or replaced the beneficiary's nebulizer, oxygen 

concentrator, or other respiratory equipment 

Supplier arranged for initial drug supply to be picked up at local retail pharmacy 

Service that does not fit into these categories 

Supplier educated beneficiary or caregiver about nebulizer or oxygen equipment 

* Services excluded from our analysis. 

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APP E N D I X ~ A 

We excluded services outside of our scope from our analysis. We also 

excluded undocumented services, duplicate reporting of services, and 

unsuccessful service attempts, such as attempted phone calls with no 

answer. After all exclusions, the total number of services in our 

analysis was 4,130. See Table 5 for a breakdown of the services we 

excluded from our analysis. 

Table 5: Services Excluded From Analysis, by Category 

Service Category Number of Services 

Excluded 

Equipment-related

Drug delivery 

Billing activity

Pharmacy activity 

Duplicate service

Undocumented service 

Unsuccessful service attempt

Related to non-Medicare drug

Other reason

 441 

3,520 

61 

1,516 

344 

1,505 

181 

68 

11 

Total services outside the scope of analysis 7,647 

Source: Office of Inspector General Survey of Inhalation Drug Suppliers, 2005. 

We based our analysis of average services per month on the count of 

documented services each beneficiary received in each month. We 

included a month in our analysis if the supplier reported any 

documented drug-related service, including delivery, during that month. 

This approach allowed us to include months with services even if there 

was no Medicare claim billed in those months. For example, when a 

beneficiary begins using inhalation drugs, his or her supplier could 

provide services such as clinical intake and contacting the beneficiary’s 

physician’s office before billing Medicare for drugs. Our approach 

enabled us to include these services in our analysis. 

Our analysis of the percentage of beneficiaries who got a particular 

service is based on a count of those that received the service at least 

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APP E N D I X ~ A 

once during 2003 divided by the total number of beneficiaries for whom 

we received a survey response. 

The numbers of beneficiaries in our analysis changed depending on 

whether we were analyzing our data at the beneficiary level or at the 

service level and whether or not we were focusing on subgroups of 

beneficiaries or services. We excluded beneficiaries whose suppliers 

reported no documented services, including delivery, from all analysis 

except that projecting the overall percentages of beneficiaries that 

received services. We excluded beneficiaries whose suppliers only 

reported documented drug deliveries from all analysis except our 

calculations of average services per month and our projections of the 

overall percentages of beneficiaries that received services. 

We weighted the results of our analysis to account for our sample 

design. 

Confidence intervals and point estimates are provided in Table 10 in 

Appendix B. 

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APP E N D I X ~ B 

DATA TABLES 

Table 6: Number of Medicare Beneficiaries Receiving Different Services 

from Inhalation Drug Suppliers in 2003* 

Service Frequency of 

Beneficiaries 

Estimated 

Population of 

Beneficiaries 

Percent of 

Beneficiaries Who 

Received Service 

Contacted for a Refill 

Contacted Physician's Office 

Reviewed Drug Compliance 

Clinical Intake 

Performed Education 

Responded to Inquiry

Revised Plan of Care

Patient Tracking

Delivery Followup

Delivery Notification

Other Service

Stat Dose

Respiratory Assessment

Delivery Confirmation

303 

268 

140 

170 

103 

48

 38

 21

 18

 26

 13

 13

 12

 8

555,357 

486,361 

251928 

228,350 

152,321 

 73,838

 45,991

 40,547

 32,463

 29,696

 24,290

 24,218

 24,174

 4,757

59.9 

52.5 

27.2 

24.6 

16.4 

 8.0 

 5.0 

 4.4 

 3.5 

 3.2 

 2.6 

 2.6 

 2.6 

 0.5 

Source: Office of Inspector General Survey of Inhalation Drug Suppliers, 2005. 

* Beneficiaries may receive more than one service. 

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APP E N D I X ~ B 

Table 7: Frequency and Percent of Services Provided to Medicare 

Beneficiaries by Inhalation Drug Suppliers in 2003 

Service Sample Frequency 

of Services 

Estimated 

Population of 

Services 

Percent of All 

Services 

Contacted for a Refill 

Reviewed Drug Compliance

Contacted Physician's Office

Performed Education

Clinical Intake

Responded to Inquiry

Delivery Followup, Patient 

Tracking, Revised Plan of Care, 

Respiratory Asessment, Delivery 

Notification, Other Service, Stat 

Dose, Delivery Confirmation

2,316 

570

 500

 289

 183

 76

 196

3,675,554 

 952,208 

 801,099 

 485,108

 245,114

 115,126

 299,578

55.9 

14.5 

12.2 

 7.4 

 3.7 

 1.8 

 4.6 

Overall Total 4,130 6,573,787 100 

Source: Office of Inspector General Survey of Inhalation Drug Suppliers, 2005. 

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APP E N D I X ~ B 

Table 8: Number of Services Delivered by Inhalation Drug Suppliers in 2003 

by Method of Service Delivery 

Service Delivery Method Frequency of 

Services 

Estimated 

Population of 

Services 

Percent of All 

Services 

By Telephone Contact with 

Beneficiary 

No Interaction

By a Delivery Service

By U.S. Postal Service

By Company Staff Visiting in 

Beneficiary Home

In Person at Retail Location, By 

Company Delivery Person, Other 

Service Delivery Type, Could Not 

Verify Service Delivery Type

3,044 

614

 197

 129

 71

 75

4,809,297 

 943,125 

 361,033

 154,883

 144,862

 160,586

73.2 

14.4 

 5.5 

 2.4 

 2.2 

 2.4 

Overall Total 4,130 6,573,786 100 

Source: Office of Inspector General Survey of Inhalation Drug Suppliers, 2005. 

Table 9: Number of Medicare Beneficiaries Receiving Services from 

Inhalation Drug Suppliers in 2003 by Method of Service Delivery* 

Service Delivery Method Frequency of 

Beneficiaries 

Estimated 

Population of 

Beneficiaries 

Percent of 

Beneficiaries Who 

Received Service 

Delivery Method 

By Telephone Contact with 

Beneficiary 

No Interaction 

By a Delivery Service

By U.S. Postal Service

By Company Staff Visiting in 

Beneficiary Home

In Person at Retail Location, By 

Company Delivery Person, Other 

Service Delivery Type

313 

280 

34

 47

 44

 14

590,517 

514,298 

 80,100

 73,647

 69,405

 28,239

63.7 

55.5 

 8.6 

 7.9 

 7.5 

 3.1 

Source: Office of Inspector General Survey of Inhalation Drug Suppliers, 2005. 

* Beneficiaries may receive multiple services through multiple methods. 

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APP E N D I X ~ B 

Table 10: Confidence Intervals 

Statistic Point Estimate n 95 Percent Confidence 

Interval 

Percent of beneficiaries who received a refill contact 

Percent of beneficiaries with 2 months or more of drug claims who did 

not get a refill contact during the year 

Percent of beneficiaries whose doctors were contacted by their supplier 

Percent of physician contacts that occur in the first month suppliers bill 

for drugs 

Drop in doctor contacts from month 1 to subsequent months 

Percent of beneficiaries who received a compliance review 

Percent of compliance reviews done over the telephone during a refill call 

Percent of beneficiaries who got education 

Percent of beneficiaries who had an inquiry answered by their supplier 

Percent of beneficiaries who had their care plan revised 

Percent of beneficiaries who got a respiratory assessment 

Percent of beneficiaries who got no services 

Percent of all services that were refill contacts 

Percent of services that were medication compliance reviews 

Percent of services that were contacting physician offices 

Percent of services that were beneficiary/caregiver education 

Percent of services that were clinical intake 

Percent of services that were responding to beneficiary inquiries 

Percent of services that were other services including respiratory 

assessments and care plan revisions 

Percent of services provided by telephone 

Percent of refill contacts done by telephone 

Percent of compliance reviews done by telephone 

Percent of services with no beneficiary interaction 

Percent of beneficiaries who got a home visit 

Percent of services provided by home visit 

Percent of beneficiaries who got drugs and respiratory equipment from 

their inhalation drug supplier 

Number of services in first month 

Low number of services received in months 2 - 8 

High number of services received in months 2 - 8 

Average number of services beneficiaries received in 2003 

Excluding refill contacts, average number of services beneficiaries 

received in 2003 

59.9% 

30.8% 

52.4% 

49.8% 

0.61 

27.2% 

89.1% 

16.4% 

8.0% 

5.0% 

2.6% 

16.3% 

55.9% 

14.5% 

12.2% 

7.4% 

3.7% 

1.8% 

4.6% 

73.2% 

93.5% 

96.0% 

14.4% 

8.8% 

2.4% 

74.1% 

1.96 

1.01 

1.17 

1.20 

0.71 

461 

377 

461 

146 

212 

461 

142 

461 

461 

461 

461 

409 

377 

377 

377 

377 

377 

377 

377 

377 

303 

142 

377 

461 

377 

461 

215 

203 

192 

444 

444 

54% - 66% 

24% - 37% 

46% - 59% 

44% - 56% 

0.51 - 0.72 

22% - 33% 

84% - 95% 

12% - 21% 

5% - 11% 

2% - 8% 

1% - 5% 

12% - 21% 

52% - 59% 

11% - 18% 

10% - 14% 

4% - 10% 

3% - 5% 

1% - 3% 

3% - 6% 

69% - 77% 

90% - 97% 

92% - 100% 

12% - 17% 

5% - 12% 

1% - 4% 

69% - 80% 

1.75 - 2.18 

0.87 - 1.16 

1.01 - 1.35 

1.08 - 1.32 

0.60 - 0.82 

Source: Office of Inspector General Survey of Inhalation Drug Suppliers, 2005 

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APP E N D I X ~ C 

NONRESPONDENT ANALYSIS 

A consideration in surveys or data collection efforts of this type is 

whether the results may be biased by significant differences between 

respondents and nonrespondents. To determine whether significant 

differences exist in this data collection effort, we compared respondents 

and nonrespondents by whether or not beneficiaries got respiratory 

equipment from their inhalation drug suppliers and by the average 

months of inhalation drug claims beneficiaries had in Medicare’s 

National Claims History file. 

We achieved a 96 percent response rate with respect to the beneficiaries 

sampled. As a result, we had 461 responses and 19 nonresponses to use 

for this analysis. 

Our analysis suggests that our survey results were not biased with 

regard to these variables. 

Analysis by Whether the Beneficiary Also Received Equipment 

A chi-square test showed no relationship between respondents and 

nonrespondents with respect to beneficiaries receiving respiratory 

equipment from their inhalation drug suppliers. (See Table 11.) 

Table 11: Analysis by Whether the Beneficiary Also Received Equipment 

Received 

Equipment 

(Number) 

Received 

Equipment 

(Percent*) 

Did Not Receive 

Equipment 

(Number) 

Did Not Receive 

Equipment 

(Percent*) 

Sample (n=480) 

Respondents (n=461) 

Nonrespondents (n=19)

369 

359 

10 

73.1 

73.3 

69.1

111 

102 

9 

26.9 

26.7 

30.9 

Source: Office of Inspector General Survey of Inhalation Drug Suppliers, 2005. 

* Percents were weighted based on the sample design. 

Chi-square=0.08 (not significant) 

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APP E N D I X ~ C 

Analysis by Average Months of Claims 

We performed a t-test to compare the average months of inhalation drug 

claims between respondents and nonrespondents. The difference was 

not statistically significant. (See Table 12.) 

Table 12: Analysis by Average Months of Claims 

Sample (n=480) Average Months of Claims* 

Respondents (n=461) 

Nonrespondents (n=19) 

4.97 

6.10 

Source: Office of Inspector General Survey of Inhalation Drug Suppliers, 2005. 

* Average claims were weighted based on the sample design. 

t=1.09 (not significant) 

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Δ AGENCY COMMENTS 

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Δ ACKNOWLEDGMENTS 

This report was prepared under the direction of Joyce M. Greenleaf, 

Regional Inspector General for Evaluation and Inspections in the 

Boston regional office, and Russell W. Hereford, Assistant Regional 

Inspector General. Other principal Office of Evaluation and Inspections 

staff who contributed include: 

Kenneth R. Price, Team Leader 

Ivan E. Troy, Program Analyst 

Benjamin T. Mahdi, Intern 

Linda B. Abbott, Program Specialist 

Technical Assistance 

Barbara Tedesco, Mathematical Statistician 

David Graf, Program Analyst 

Rob Gibbons, Program Analyst 

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