Department of Health and Human Services 

OFFICE OF 

INSPECTOR GENERAL 

Medicare Reimbursement for Parenteral 

Nutrition 

JUNE GIBBS BROWN 

Inspector General 

JULY 1997 

OEI-03-96-00230 I 
OFFICE OF INSPECTOR GENERAL 

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

452, is to protect the integrity of the Department of Health and Human Services programs 

as well as the health and welfare of beneficiaries served by them. This statutory mission 

is carried out through a nationwide program of audits, investigations, inspections, 

sanctions, and fraud alerts. The Inspector General informs the Secretary of program and 

management problems and recommends legislative, regulatory, and operational approaches 

to correct them. 

Office of Evaluation and Inspections 

The Office of Evaluation and Inspections (OEI) is one of several components of the Office 

of Inspector General. It conducts short-term management and program evaluations (called 

inspections) that focus on issues of concern to the Department, the Congress, and the 

public. The inspection reports provide findings and recommendations on the efficiency, 

vulnerability, and effectiveness of departmental programs. 

OEI’s Philadelphia Regional Office prepared this report under the direction of Robert 

A.Vito, Regional Inspector General. Principal OEI staff included: 

REGION HEADOUARTERS 

Nancy J. Molyneaux, Project Leader Jennifer Antico, Program Specialist 

Cynthia Hansford, Program Assistant Brian Ritchie, TSS 

Daniel Lai, Intern 

Amy Lin, Intern 

Andrew Peterson Pharm. D., Consultant 

OFFICE OF AUDIT SERVICES 

Maritza Hawrey , Auditor 

To obtain a copy of this report, call the Philadelphia Regional Office at l-800-531-9562. 
EXECUTIVE SUMMARY 

PURPOSE 

This report examines Medicare’s reimbursement of parenteral nutrition compared to 

that of State Medicaid agencies, Medicare risk-contract health maintenance 

organizations (HMOs), and manufacturers’ charges to suppliers. 

BACKGROUND 

Medicare Coverage of Parenteral Nutrition 

For Medicare beneficiaries with severe permanent disease of the gastrointestinal tract, 

parenteral nutrition may be the only way to receive the nutrients they need. 

Parenteral nutrition is a liquid solution provided intravenously through use of an 

indwelling catheter and a parenteral nutrition infusion pump. Parenteral nutrition is 

covered under Medicare’s prosthetic device provision. According to the Medicare 

Carriers Manual, section 2130, Medicare covers accessories and/or supplies which are 

used with a parenteral device to achieve the therapeutic benefit of the device. 

Medicare only covers parenteral nutrition for beneficiaries whose gastrointestinal 

condition (e.g., massive bowel resection) permanently prevents them from absorbing 

the nutrients needed to maintain weight and strength commensurate with their health 

status. 

According to the Part B Extract and Summary System (BESS), Medicare allowed $163 

million in 1995 for parenteral nutrition solutions, not including pumps or supplies. 

Eighty-nine percent of this was for just four procedure codes (B4189, B4193, B4197, 

and B4199) representing pre-mixed parenteral solutions with varying amounts of 

protein. See Appendix A for a complete description of each code. 

We compared Medicare’s reimbursement methodology and reimbursement levels for 

the four parenteral nutrition procedure codes with the highest allowances in 1995 with 

those of State Medicaid agencies and the 20 Medicare risk-contract HMOs with the 

highest enrollments. We also compared Medicare’s reimbursement levels with 

manufacturers’ contract prices for one low-volume parenteral nutrition supplier. 

FINDINGS 

Medicare reimbursement for the four parenteral nutrition codes is an average of 45 

percent higher than lower-paying Medicaid agencies. 

Thirty-two of the 49 Medicaid agencies that responded to our survey were able to 

provide at least some pricing information on the four selected parenteral nutrition 

procedure codes. Medicare reimbursement for one or more of the four parenteral 

nutrition codes is higher than that of the majority of these 32 agencies. 

i 
Medicare reimbursement for the four parenteral nutrition codes is an average of 78 

percent higher than lower-paying Medicare risk-contract HMOs. 

Ten of the 17 Medicare risk-contract HMOs that responded to our survey were able 

to provide pricing information on one or more of the four selected parenteral nutrition 

codes. Medicare reimburses more than all 10 HMOs for one or more of the four 

codes examined. 

Medicare reimbursement for the four parenteral nutrition codes is an average of 11 times 

higher than some manufacturers’ contract prices. 

Medicare reimbursement for the four selected codes is between 9 and 12 times 

percent higher than the contracted price charged by three manufacturers to a lowvolume supplier of parenteral nutrition. 

RECOMMENDATION 

HCFA should examine other paymentmethodsthat could lead to more cost effective 

reimbursementfor parenteralnutritionsolutions. 

It is clear that many other payers reimburse less than Medicare for parenteral 

nutrition. In addition, suppliers may purchase parenteral nutrition solutions at 

discounted prices which are significantly lower than Medicare’s reimbursement rates. 

We urge HCFA to pursue one or more of the following options to bring Medicare’s 

reimbursement in line with Medicaid and other payers. 

Inherent Reasonableness 

The Secretary or the DMERCs can use their “inherent reasonableness” authority to 

reduce reimbursement to more appropriate levels. 

Acquisition Cost 

The HCFA could base its reimbursement on suppliers acquisition costs. There is 

evidence that acquisition costs for parenteral nutrition are far below Medicare’s 

current reimbursement rate. 

Competitive Bidding 

The HCFA could seek legislative authority to use competitive bidding to take 

advantage of its position as a high-volume purchaser of parenteral nutrition. 

ii 
AGENCY COMMENTS 

The HCFA concurred with our recommendation. The HCFA reported that they have 

convened a Workgroup to focus on ways to reduce and control costs for parenteral 

nutrition. The HCFA also explained that the President’s Fiscal Year 1998 budget 

includes proposals to give carriers the authority to make inherent reasonableness 

adjustments for durable medical equipment, to eliminate the mark up for drugs and 

biologicals and include acquisition cost in the reimbursement calculation, and to 

authorize the Secretary to set payment rates for Part B services bases on competitive 

bidding. 

... 

111 
TABLE OF CONTENTS 

PAGE 

EXECUTM3SUMMARY 

INTRODUCI’ION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 

FINDINGS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 

@Medicare Reimburses More Than Many State 

Medicaid Agencies . . . . . . . . . . . . . . . . . . , . . . . . . . . . . . . . . . . . . . . . . . . . . 4 

*Medicare Reimburses More Than Many Medicare 

Risk-Contract HMOs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 

@Medicare Reimburses Significantly More Than 

Manufacturers Charge Suppliers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 

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

ENDNOTES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 

APPENDIX A: Definition of Procedure Codes . . . . . . . . . . . . . . . . . . . . . . . . . A-l 

APPENDIX B: Agency Comments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . B-l 
INTRODUCTION 

PURPOSE 

This report examines Medicare’s reimbursement of parenteral nutrition compared to 

that of State Medicaid agencies, Medicare risk-contract health maintenance 

organizations (HMOs), and manufacturers’ charges to suppliers. 

BACKGROUND 

For Medicare beneficiaries with severe permanent disease of the gastrointestinal tract, 

parenteral nutrition may be the only way to receive the nutrients they need. 

Parenteral nutrition is a liquid solution provided intravenously through use of an 

indwelling catheter and a parenteral nutrition infusion pump. The solution is usually 

composed of protein, carbohydrates, electrolytes, multivitamins, and trace elements. 

Beneficiaries using parenteral nutrition may also be administered fat emulsions (lipids) 

about twice a week. 

Medicare Program 

Parenteral nutrition is covered under Medicare’s prosthetic device provision. 

According to the Medicare Carriers Manual, section 2130, Medicare covers accessories 

and/or supplies which are used with a parenteral device to achieve the therapeutic 

benefit of the device. Medicare only covers parenteral nutrition for beneficiaries 

whose gastrointestinal condition (e.g., massive bowel resection) permanently prevents 

them from absorbing the nutrients needed to maintain weight and strength 

commensurate with their health status, Parenteral nutrition is only covered when 

administered under a doctor’s order. 

As of October 1993, the Health Care Financing Administration (HCFA), which 

administers the Medicare program, began to regionalize the processing of claims for 

durable medical equipment, prosthetics, orthotics and supplies (DMEPOS) into four 

Durable Medical Equipment Regional Carriers (DMERCs). Prior to this, HCFA 

contracted with two specialty carriers to process parenteral nutrition claims. 

Parenteral nutrition, as a supply used with a prosthetic device, is part of the 

DMERCs’ claims processing responsibilities. Establishing the DMERCs was part of 

an effort by HCFA to prevent fraud and abuse and streamline claims processing. The 

DMERCs are also responsible for setting the reimbursement amounts based on 

Medicare guidelines. 

3 
Medicare Allowances for Parenteral Nutrition 

According to the Part B Extract and Summary System (BESS), Medicare allowed $163 

million in 1995 for parenteral nutrition solutions, not including pumps or supplies. 

Eighty-nine percent of this was for just four procedure codes (B4189, B4193, B4197, 

and B4199) representing pre-mixed parenteral solutions with varying amounts of 

protein. See Appendix A for a complete description of each code. According to the 

Medicare Coverage Issues Manual, parenteral nutrition components are normally 

mixed by the beneficiary or another nonprofessional person. However, Medicare will 

cover the more expensive pre-mixed solutions if the beneficiary is unable to safely or 

effectively mix the solution and there is no family member or other person who can do 

so. In 1993 and 1994, the four pre-mixed solution codes represented, respectively, 89 

and 81 percent of all allowances for parenteral nutrition solution. 

Medicare Reimbursement Methodology 

Medicare establishes reimbursement for 23 procedure codes related to parenteral 

nutrition. Medicare uses the reasonable charge methodology to determine the 

allowances for each parenteral nutrition code. The reasonable charge which is used in 

determining the allowed amount for a particular procedure code is the lowest of: 

1. the actual charge as submitted on the claim; 

2. the supplier’s customary charge; 

3. the prevailing charge; 

4. the lowest charge level (LCL); or 

5. the inflation index charge (IIC). 

According to the Omnibus Budget Reconciliation Act of 1986, reimbursement levels 

for parenteral nutrition solutions and supplies must include the lowest charge level 

methodology. The lowest charge level is the 25th percentile of providers’ charges. 

Other Payers’ Reimbursement Methodologies 

According to research conducted by the Office of Inspector General’s (OIG) Office of 

Audit Services (OAS), some other payers pay significantly less for parenteral nutrition 

than Medicare. Some of these payers’ reimbursement formulas include payments 

based on all-inclusive per diem rates. All-inclusive or global rates include parenteral 

nutrition solution, supplies, administration kits, infusion pumps, and IV poles. 

Related Work by the Office of Inspector General 

In 1993, the OIG’s Office of Evaluation and Inspections released a report titled, 

Inappropriate Payments for Total Pat-enter-alNutrition (OEI-12-92-00460). The 

inspection found: (1) Medicare overpaid $69 million for total parenteral nutrition in 

1991, 43 percent of the total of $162 million allowed for this service; (2) 53 percent of 

the beneficiaries had end-stage renal disease and received parenteral nutrition as a 

2 
supplement three times a week, at high cost and with questionable benefits; (3) review 

of the use of parenteral nutrition among non end-stage renal disease beneficiaries 

revealed inappropriate patient selection and over- and under-feeding. 

MJZlTlODOLOGY 

We determined Medicare’s allowances for each of the 23 procedure codes which cover 

parenteral nutrition solutions and supplies. We arrayed these codes by allowance for 

1993, 1994, and 1995. We determined Medicare’s 1996 reimbursement levels based on 

the Medicare’s maximum reimbursement for the four parenteral nutrition solution 

codes with the highest allowances in 1995. 

With the assistance of a pharmacist-consultant, we identified the components which 

would generally be included in solutions reimbursed under each of the four codes. 

We contacted each State Medicaid agency to determine what their reimbursement 

formulas were and their maximum reimbursement for the solutions representing the 

four codes. We also determined what items or services, if any, were included in their 

reimbursement for parenteral nutrition solutions. 

We identified the 20 Medicare risk-contract HMOs with the highest enrollments as of 

July 1996. These HMOs covered 50 percent of all Medicare beneficiaries enrolled in 

risk-contract HMOs. We contacted each HMO to determine what their 

reimbursement formulas were and their maximum reimbursement for the solutions 

representing the four codes. We also determined what other items or services were 

included in their reimbursement for parenteral nutrition solutions. 

Supplier 

In order to provide an illustration of provider acquisition costs for parenteral nutrition 

solution, we obtained one supplier’s contracted prices for parenteral nutrition 

products. We compared the supplier’s cost for the nutrition products with Medicare 

reimbursement rates. These contracted prices are from the three manufacturers that 

dominate the parenteral nutrition market. Manufacturers provide different contracted 

prices to suppliers based on the volume purchased. Since we received information 

from a low-volume supplier, the manufacturers’ contracted prices represent the upper 

threshold of suppliers’ contracted acquisition costs. Large volume purchasers would 

probably receive even further discounts in price from the manufacturers. 

While our primary emphasis is on how Medicare’s reimbursement compares to that of 

other payers, we used the supplier’s contracted prices with manufacturers to provide a 

basic comparison of how acquisition costs for parenteral nutrition products compare to 

Medicare’s reimbursement. 

3 
FINDINGS 

Medicare Reimbursement for the Four Parenteral Nutrition Codes is an 

Average of 45 Percent Higher Than Lower-Paying Medicaid Agencies. 

Thirty-two of the 49 Medicaid agencies that responded to our survey provided pricing 

information on one or more of the four selected parenteral nutrition procedure codes. 

Medicare reimbursement for one or more of the four parenteral nutrition codes is 

higher than that of the majority of these 32 agencies (see Chart A on the next page). 

In 1995, if Medicare reimbursement for each of these four codes were reduced by the 

average amount Medicare reimburses more than lower-paying Medicaid agencies, total 

allowances would have been reduced from $145 million to $80 mil1ion.i 

Procedure Code B4189 

Medicare reimbursement for B4189 ($162.39) is higher than more than two-thirds of 

the State Medicaid agencies that provided prices for this code. Medicare’s 

reimbursement ranges between 3 and 204 percent higher than these Medicaid 

agencies’ reimbursement, averaging 55 percent higher. In 1995, if Medicare 

reimbursement for this code was reduced by the average amount Medicare reimburses 

more than lower-paying Medicaid agencies, Medicare allowances would have been 

reduced from $24 million to $10.8 million. 

Procedure Code B4193 

Medicare’s reimbursement for B4193 ($209.84) is higher than four-fifths of the State 

Medicaid agencies that provided prices for this code. Medicare’s reimbursement 

ranges between less than 1 and 215 percent higher than these Medicaid agencies’ 

reimbursement, averaging 39 percent higher. In 1995, if Medicare reimbursement for 

this code was reduced by the average amount Medicare reimburses more than lowerpaying Medicaid agencies, Medicare allowances would have been reduced from $39 

million to $23.8 million. 

Procedure Code B4197 

Medicare’s reimbursement for B4197 ($248.00) is higher than more than threequarters of the State Medicaid agencies that provided prices for this code. Medicare’s 

reimbursement ranges between 2 and 217 percent higher than these Medicaid 

agencies’ reimbursement, averaging 46 percent higher. In 1995, if Medicare 

reimbursement for this code was reduced by the average amount Medicare reimburses 

more than lower-paying Medicaid agencies, Medicare allowances would have been 

reduced from $66 million to $35.7 million. 

4 
Procedure Code B4199 

Medicare’s reimbursement for B4199 ($276.00) is higher than well over half of the 

State Medicaid agencies that provided prices for this code. Medicare’s reimbursement 

ranges between less than 1 and 209 percent higher, averaging 39 percent higher. In 

1995, if Medicare reimbursement for this code was reduced by the average amount 

Medicare reimburses more than lower-paying Medicaid agencies, Medicare allowances 

would have been reduced from $16 million to $9.6 million. 

ChartA 

MEDICAID AaENCIES WHICH REIMBURSE LESS -l-HAN MEDICARE 

COMPARED TO -l-O-,-AL A<3ENCIES BY HCPCS 36 1 

Other Reimbursement Formulas 

Medicaid agencies which reimburse less than Medicare for parenteral nutrition use a 

variety of reimbursement formulas. These include, but are not limited to, 

reimbursement based on: (1) the average wholesale price (AWP), (2) estimated costs, 

(3) fee schedules, (4) global rates, and (5) previous Medicare rates. Reimbursement 

may also include dispensing fees, compounding fees, and payments for additives to the 

parenteral nutrition solution. Many of the Medicaid agencies that reimburse less than 

Medicare’s current reimbursement rate use a global rate or base their reimbursement 

on Medicare rates from previous years. Many of those agencies which could not give 

us pricing information reimburse based on average wholesale prices or estimated costs 

which vary by product. Other agencies apply several formulas to calculate their 

reimbursement, then reimburse whichever is lowest. 

J 
Other Items Included in Parenteral Nutrition Reimbmement 

While Medicare reimburses separately for each parenteral nutrition supply, it does not 

provide separate reimbursement for services related to parenteral nutrition. In 

contrast, some Medicaid agencies include both supplies and services in their 

reimbursement formula. Of the eight agencies that reported including all other items 

in their reimbursement, six reimburse less than Medicare reimburses for the solution 

alone for at least one of the four parenteral nutrition codes. Supplies include lipids, 

administration kits, supply kits, infusion pumps, and IV poles. Some of these agencies 

also include added medications, education, labor, and lab work in their 

reimbursement. For example, one agency, which reimburses based on a global rate, 

reimburses $76 per liter of parenteral nutrition solution including labor and delivery, 

the pump, supplies and added ingredients such as lipids. Medicare, on the other hand, 

reimburses between $162 and $276 depending on the grams of protein in the solution 

and reimburses an additional amount for the pump and other supplies. At least five 

other Medicaid agencies include some supplies or services in their reimbursement for 

parenteral nutrition solutions. 

Medicare Reimbursement for the Four Parenteral Nutrition Codes is an 

Average of 78 Percent Higher Than Lower-Paying Medicare RiskContract HMOs. 

Ten of the 17 Medicare risk-contract HMOs that responded to our survey were able 

to provide pricing information on one or more of the four selected parenteral nutrition 

codes. Medicare reimburses more than all 10 HMOs for one or more of the four 

codes examined (see Chart B on the next page). In 1995, if Medicare reimbursement 

for each of these four codes were reduced by the average amount Medicare 

reimburses more than lower-paying Medicare risk-contract HMOs, total allowances 

would have been reduced from $145 million to $31 million.’ 

Procedure Code B4189 

Medicare reimbursement for B4189 ($162.39) is higher than two-thirds of the HMOs 

that provided prices for this code. Medicare’s reimbursement ranges between 2 and 

195 percent higher than these Medicare HMOs’ reimbursement, averaging 74 percent 

higher. In 1995, if Medicare reimbursement for this code was reduced by the average 

amount Medicare reimburses more than lower-paying HMOs, Medicare allowances 

would have been reduced from $24 million to $6.3 million. 

Procedure Code B4193 

Medicare reimbursement for B4193 ($209.84) is higher than nearly three-quarters of 

the HMOs that provided prices for that code. Medicare’s reimbursement ranges 

between 2 and 282 percent higher than these Medicare HMOs’ reimbursement, 

averaging 87 percent higher. In 1995, if Medicare reimbursement for this code was 

6 
reduced by the average amount Medicare reimburses more than lower-paying HMOs, 

Medicare allowances would have been reduced from $39 million to $5.1 million. 

Procedure Code B4197 

Medicare reimbursement for B4197 ($248.00) is higher than nearly all of the HMOs 

that provided prices for that code. Medicare’s reimbursement ranges between 1 and 

351 percent higher than these Medicare HMOs’ reimbursement, averaging 77 percent 

higher. In 1995, if Medicare reimbursement for this code was reduced by the average 

amount Medicare reimburses more than lower-paying HMOs, Medicare allowances 

would have been reduced from $66 million to $15.2 million. 

Procedure Code B4199 

Medicare reimbursement for B4199 ($276.00) is higher than all the HMOs that 

provided prices for that code. Medicare’s reimbursement ranges between 6 and 325 

percent higher than these Medicare HMOs’ reimbursement, averaging 72 percent 

higher. In 1995, if Medicare reimbursement for this code was reduced by the average 

amount Medicare reimburses more than lower-paying HMOs, Medicare allowances 

would have been reduced from $16 million to $4.4 million. 

Chart B 

MEDICARE RISK-CONTRACT HMO8 WHICH REIMBURSE LESS THAN MEDICARE 

COMPARED -l-O l-O-l-AL HMO= BY HCPCS ‘(‘I 

1 

7 
Other Reimbursement Form&s 

Medicare HMOs which reimburse less than Medicare use a variety of reimbursement 

methods including reimbursement based on AWP, fee schedules, and global rates. 

However, no particular reimbursement formula used by Medicare HMOs is 

consistently lower than Medicare’s rates. 

Other Items Included in Parenteral Nutrition Reimbursement 

At least nine Medicare HMOs include items other than the solution in their 

reimbursement for parenteral nutrition. All nine include administration kits, supply 

kits, pumps, and IV poles. Six HMOs include lipids and at least five include the 

services of a health care professional. Seven of the nine HMOs that include some 

supplies in their reimbursement, reimburse less than Medicare does for the parenteral 

nutrition solution alone. 

Few of the Medicare HMOs that gave us pricing information reimburse more than 

Medicare for any of the four parenteral nutrition codes. Of those that do, 

reimbursement is not significantly higher than Medicare’s. Four Medicare HMOs 

reimburse more than Medicare for B4189 by an average of 18 percent. Two Medicare 

HMOs reimburse more than Medicare for B4193 by an average of 9 percent. One 

Medicare HMO reimburses 5 percent more than Medicare for B4197. No Medicare 

HMOs reimburse more than Medicare for B4199. 

Medicare Reimbursement for the Four Parenteral Nutrition Codes is an 

Average of 11 Times Higher Than Some Manufacturers’ Contract Prices. 

Medicare reimbursement for the four selected codes is between 9 and 12 times higher 

than the contracted price charged by three manufacturers to a low-volume supplier of 

parenteral nutrition.3 It is our assumption that manufacturer charges to highervolume suppliers would be even lower. 

Manufacturers’ contract prices for each of the parenteral nutrition solution codes 

examined ranged between $13 and $29 for one supplier. Medicare allows between 

$162 and $276 for each of the four codes. While both the manufacturers’ prices and 

Medicare rates presented here represent only the cost of the parenteral nutrition 

solution, it is clear that Medicare rates for the solution are significantly higher than the 

discounted costs of one low-volume supplier. 

8 
RECOMMENDATION 

The HCFA Should Examine Other Payment Methods That Could Lead 

To More Cost Effective Reimbursement For Parenteral Nutrition 

solutions. 

It is clear that many other payers reimburse less than Medicare for parenteral 

nutrition. In addition, suppliers may purchase parenteral nutrition solutions at 

discounted prices which are significantly lower than Medicare’s reimbursement rates. 

Implementing an alternative reimbursement method could result in significant savings 

to the Medicare program. We urge HCFA to pursue one or more of the following 

options to bring Medicare’s reimbursement in line with Medicaid and other payers. 

Inherent Reasonableness 

The Secretary or the DMERCs could use their “inherent reasonableness” authority to 

reduce reimbursement to more appropriate levels. 

Acquisition Cost 

The HCFA could base its reimbursement on suppliers acquisition costs. There is 

evidence that acquisition costs for parenteral nutrition are far below Medicare’s 

current reimbursement rate. 

Competitive Bidding 

The HCFA could seek legislative authority to use competitive bidding to take 

advantage of its position as a high-volume purchaser of parenteral nutrition. 

AGENCY COMMENTS 

The HCFA concurred with our recommendation. The HCFA reported that they have 

convened a Workgroup to focus on ways to reduce and control costs for parenteral 

nutrition. The HCFA also explained that the President’s Fiscal Year 1998 budget 

includes proposals to give carriers the authority to make inherent reasonableness 

adjustments for durable medical equipment, to eliminate the mark up for drugs and 

biologicals and include acquisition cost in the reimbursement calculation, and to 

authorize the Secretary to set payment rates for Part B services bases on competitive 

bidding. The full text of HCFA’s comments is included in Appendix B. 

9 
ENDNOTES 

1. The average which Medicare reimburses more than Medicaid was calculated in the 

following manner: 

For each code the percentage difference between each lower-paying Medicaid 

agency’s price and Medicare’s reimbursement level was calculated. These 

percentage differences were then averaged for each code. Using the average 

for each code we calculated the overall percentage difference in prices for 

parenteral nutrition. Potential Medicare reductions in allowances were 

calculated by subtracting the overall percentage difference from Medicare’s 

actual 1995 allowances. 

The average differences for Medicare risk-contract HMOs and manufacturers’ 

contract prices were calculated in the same manner. 

2. See explanation of calculations above. 

3. See explanation of calculations above. 

10 
APPENDIX A 

Definition of four parenteral nutrition procedure codes with the highest allowances in 

1995. 

B4189 

B4193 

B4197 

B4199 

Parenteral nutrition 

carbohydrates with 

including preparation, 

premix. 

Parenteral nutrition 

carbohydrates with 

including preparation, 

premix. 

Parenteral nutrition 

carbohydrates with 

including preparation, 

premix. 

Parenteral nutrition 

carbohydrates with 

including preparation, 

premix. 

solution; compounded amino acid and 

electrolytes, trace elements, and vitamins 

any strength, 10 to 51 grams of protein -

solution; compounded amino acid and 

electrolytes, trace elements, and vitamins 

any strength, 52 to 73 grams of protein -

solution; compounded amino acid and 

electrolytes, trace elements, and vitamins 

any strength, 74 to 100 grams of protein -

solution; compounded amino acid and 

electrolytes, trace elements, and vitamins 

any strength, over 100 grams of protein -

A-l 
APPENDIX B 

AGENCY COMMENTS 

B-l 
� 

Health Care 

Financmg Adnmstrat~on 

Memorandum 

JUN 2 7 1997 

DATE 

TO June Gibbs Brown 

Inspector General 

.C 

FROM Bruce C. VIadeck. 

Administrator 

SUBJECT Office of Inspector General (OIG) Draft Report: “Medicare 

Reimbursement for Parenteral Nutrition,” (OEI-03-96-00230) 

We reviewed the above-referenced report concerning Medicare’s reimbursement of 

parenteral nutrition as compared to other payers. 

Our comments are attached for your consideration. Thank you for the opportunity to 

review and comment on this report. 

Attachment 
� 

Health Care Financing Administration (HCFA) Comments on 

Offke of Insnector General (OIG) Draft Report entitled: “Medicare Reimbursement for 

Parenteral Nutrition.” (OEI-03-96-00230) 

OIG Rmommendation 

HCFA should examine other payment methods that could lead to more cost-effective 

reimbursement for parenteral nutrition solutions. We urge HCFA to pursue one or more 

of the following options to bring Medicare’s reimbursement in line with Medicaid and 

other payers. 

Inherent Reasonableness 

The Secretary or the durable medical equipment regional carriers (DMERCs) could use 

their “inherent reasonableness” authority to reduce reimbursement to more appropriate 

levels. 

HCFA Response 

We concur. HCFA convened a Workgroup to focus on ways to reduce and control costs 

for parenteral nutrition. In fact, the Workgroup is currently considering use of the 

inherent reasonableness process as one method for reducing cost for the enteral nutrition 

therapy benefit. The results of our review of this process will enable HCFA to use 

“lessons learned” to avoid problem experiences with the enteral nutrition inherent 

reasonableness calculation. In addition, the President’s fiscal year (FY) 1998 budget 

includes a proposal that would restore to Medicare carriers the authority to make inherent 

reasonableness adjustments for DME, prosthetics (DMEPOS), and surgical dressings. * 

The Secretary’s inherent reasonableness authority would apply to all Part B services 

except physician services. 

Acquisition Cost 

HCFA could base its reimbursement on suppliers’ acquisition costs. There is evidence 

that acquisition costs for parenteral nutrition is far below Medicare’s current 

reimbursement rate. 
Page 2 

HCFA Response 

We concur. A proposal that would eliminate the mark-up for drugs and biologicals, such 

as parenteral nutrition, is included in the President’s FY 1998 budget. Under this 

provision, the Medicare amount payable for the drug or biological would be the lowest 

Of: 

(a) the physician’s, supplier’s, or other person’s actual acquisition cost, 

(b) the average wholesale price, as specified by the Secretary, 

(c) the median actual acquisition cost of all claims for the .drug or biological for the 

12-month period beginning July 1, 1998, adjusted annually and effective on 

January 1 of each year, or 

(d) the amount determined otherwise under the Social Security Act. 

HCFA could seek legislative authority to use competitive bidding to take advantage of its 

position as a high volume purchaser of parenteral nutrition. 

HCFA Resnonse 

We concur. Under a proposal included in the President’s FY 1998 budget, the Secretary 

would be authorized to set payment rates for Part B services (excluding physician 

services) based on competitive bidding. The items included in a bidding process and the 

geographic areas selected for bidding would be determined by the Secretary based on 

availability of entities able to furnish the item or services and the potential for achieving 

savings. Bids would be accepted from entities only if they met quality standards 

specified by the Secretary. The Secretary would have the authority to exclude suppliers 

whose bids are above the cut-off bid determined sufficient to maintain access. Automatic 

reductions in rates would be triggered for clinical laboratory services and DMEPOS, 

excluding oxygen services, if by 200 1 a 20 percent reduction had not been achieved.