CMS Manual 

System

Department of Health & Human Services (DHHS)

Pub 100-04 Medicare 

Claims Processing

Centers for Medicare & Medicaid Services (CMS)

Transmittal 2368 Date: December 15, 2011

Change Request 7397

NOTE: Transmittal 2312 dated September 23, 2011, is being rescinded and replaced 

with Transmittal 2368, dated December 15, 2011 to change the effective and 

implementation dates to January 1, 2013. All other material remains the same.

SUBJECT: Pharmacy Billing for Drugs Provided "Incident To" a Physician Service

This CR rescinds and fully replaces CR 7109.

I. SUMMARY OF CHANGES: This Change Request (CR) clarifies policy with respect to restrictions on 

pharmacy billing for drugs provided incident to a physician service. This CR also clarifies policy for the 

local determination of payment limits for drugs that are not nationally determined.

EFFECTIVE DATE: January 1, 2013

IMPLEMENTATION DATE: January 1, 2013

Disclaimer for manual changes only: The revision date and transmittal number apply only to red italicized 

material. Any other material was previously published and remains unchanged. However, if this revision 

contains a table of contents, you will receive the new/revised information only, and not the entire table of 

contents.

II. CHANGES IN MANUAL INSTRUCTIONS: (N/A if manual is not updated)

R=REVISED, N=NEW, D=DELETED-Only One Per Row.

R/N/D CHAPTER / SECTION / SUBSECTION / TITLE

R 17/10/Payment Rules for Drugs and Biologicals

R 17/20.1.3/Exceptions to Average Sales Price (ASP) Payment Methodology

III. FUNDING:

For Fiscal Intermediaries (FIs), Regional Home Health Intermediaries (RHHIs) and/or Carriers:

No additional funding will be provided by CMS; Contractor activities are to be carried out within their 

operating budgets.

For Medicare Administrative Contractors (MACs):

The Medicare Administrative Contractor is hereby advised that this constitutes technical direction as defined 

in your contract. CMS does not construe this as a change to the MAC Statement of Work. The contractor is
not obligated to incur costs in excess of the amounts allotted in your contract unless and until specifically 

authorized by the Contracting Officer. If the contractor considers anything provided, as described above, to 

be outside the current scope of work, the contractor shall withhold performance on the part(s) in question 

and immediately notify the Contracting Officer, in writing or by e-mail, and request formal directions 

regarding continued performance requirements.

IV. ATTACHMENTS:

Business Requirements

Manual Instruction

*Unless otherwise specified, the effective date is the date of service.
Attachment - Business Requirements

Pub. 100-04 Transmittal: 2368 Date: December 15, 2011 Change Request: 7397

NOTE: Transmittal 2312 dated September 23, 2011, is being rescinded and replaced with 

Transmittal 2368, dated December 15, 2011 to change the effective and implementation

dates to January 1, 2013. All other material remains the same.

SUBJECT: Pharmacy Billing for Drugs Provided “Incident to” a Physician’s Service. 

(This CR rescinds and fully replaces CR 7109.)

Effective Date: January 1, 2013

Implementation Date: January 1, 2013

I. GENERAL INFORMATION 

A. Background: 

This Change Request (CR) clarifies policy with respect to restrictions on pharmacy billing for drugs or 

biologicals furnished “incident to” a physician’s service. This CR also clarifies policy for the local 

determination of payment limits for drugs that are not nationally determined.

B. Policy: 

Pharmacies may bill Medicare Part B for certain classes of drugs including: immunosuppressive drugs, oral 

anti-emetic drugs, oral anti-cancer drugs, and drugs self-administered through any piece of Durable Medicare 

Equipment. Claims for these drugs are generally submitted to the Durable Medical Equipment Medicare 

Administrative Contractor (DME MAC). In the rare situation where a pharmacy dispenses a drug that will be 

administered through implanted DME and a physician’s service will not be utilized to fill the pump with the 

drug, the claim is submitted to the A/B MAC or carrier (See Medicare Claims Processing Manual, Publication 

100-04, Chapter 20, section 10). The DME MAC, A/B MAC, or carrier will make payment for these drugs, 

when deemed to be covered and reasonable and necessary, to the pharmacy. All bills submitted to the DME

MAC, A/B MAC, or carrier must be submitted on an assigned basis by the pharmacy. (See Medicare Claims 

Processing Manual, Publication 100-04, Chapter 17, section 50.B.)

Pharmacies, Suppliers and Providers may not bill Medicare Part B for drugs dispensed directly to a beneficiary

for administration “incident to” a physician service, such as refilling an implanted drug pump. These claims 

must be denied. (See Medicare Claims Processing Manual, Publication 100-04, Chapter 17, section 50.B and 

Medicare Benefit Policy Manual, Publication 100-02, Chapter 15, sections 50.3.)

Pharmacies may not bill Medicare Part B for drugs furnished to a physician for administration to a Medicare 

beneficiary. When these drugs are administered in the physician’s office to a beneficiary, the only way these 

drugs can be billed to Medicare is if the physician purchases the drugs from the pharmacy. In this case, the 

drugs are being administered “incident to” a physician’s service and pharmacies may not bill Medicare Part B

under the “incident to” provision. (See Medicare Benefit Policy Manual, Publication 100-02, Chapter 15, 

sections 50.3 and 60.1.)

The payment limits for drugs and biologicals that are not included in the ASP Medicare Part B Drug Pricing 

File or Not Otherwise Classified (NOC) Pricing File, are based on the published Wholesale Acquisition Cost 
(WAC) or invoice pricing, except under OPPS where the payment allowance limit is 95 percent of the published 

AWP. In determining the payment limit based on WAC, the payment limit is 106 percent of the lesser of the 

lowest-priced brand or median generic WAC. (See Medicare Claims Processing Manual, Publication 100-04, 

Chapter 17, section 20.1.3.)

II. BUSINESS REQUIREMENTS TABLE

Use“Shall" to denote a mandatory requirement

Number Requirement Responsibility (place an “X” in each 

applicable column)

A

/

B

M

A

C

D

M

E

M

A

C

F

I

C

A

R

R

I

E

R

R

H

H

I

SharedSystem 

Maintainers

OTH

ER

F

I

S

S

M

C

S

V

M

S

C

W

F

7397.1 Medicare contractors shall continue to follow the 

policies as clarified in the Medicare Claims Processing 

Manual, Publication 100-04, Chapter 17, section 10,

when processing claims for Medicare covered drugs.

X X X X X

7397.1.1 Medicare contractors shall deny claims from 

pharmacies for drugs that are furnished “incident to” 

physician services.

X X X

7397.1.2 Medicare carriers or A/B MACs shall reject claims 

from pharmacies for self-administered 

immunosuppressive drugs, self-administered drugs 

administered through non-implanted durable medical 

equipment, or self-administered anti-cancer or antiemetic drugs.

X X

7397.1.3 Medicare DME-MACs shall continue to process claims 

from pharmacies for self-administered 

immunosuppressive drugs, self-administered drugs 

administered through non-implanted durable medical 

equipment, and self-administered anti-cancer or antiemetic drugs according to current policies.

X

7397.1.4 Medicare A/B MACs or carriers shall continue to 

process claims from pharmacies for self-administered 

drugs administered through implanted durable medical 

equipment according to current policies.

X X

7397.2 Medicare contractors shall continue to follow the 

policies as clarified in the Medicare Claims Processing 

Manual, Publication 100-04, Chapter 17, section 

20.1.3, when determining local payment limits.

X X X X X

7397.3 Medicare contractors shall not search their files to 

either retract payment for claims already paid or to 

retroactively pay claims. However, contractors shall 

adjust claims brought to their attention.

X X X
III. PROVIDER EDUCATION TABLE

Number Requirement Responsibility (place an “X” in each 

applicable column)

A

/

B

M

A

C

D

M

E

M

A

C

F

I

C

A

R

R

I

E

R

R

H

H

I

SharedSystem 

Maintainers

OTH

ER

F

I

S

S

M

C

S

V

M

S

C

W

F

7397.4 A provider education article related to this instruction 

will be available at 

http://www.cms.hhs.gov/MLNMattersArticles/ shortly 

after the CR is released. You will receive notification of 

the article release via the established "MLN Matters" 

listserv.

Contractors shall post this article, or a direct link to this 

article, on their Web site and include information about it 

in a listserv message within one week of the availability 

of the provider education article. In addition, the 

provider education article shall be included in your next 

regularly scheduled bulletin. Contractors are free to 

supplement MLN Matters articles with localized 

information that would benefit their provider community 

in billing and administering the Medicare program 

correctly.

X X X X X

IV. SUPPORTING INFORMATION

Section A: For any recommendations and supporting information associated with listed requirements, 

use the box below: N/A

Use "Should" to denote a recommendation.

X-Ref 

Requirement

Number

Recommendations or other supporting information:

Section B: For all other recommendations and supporting information, use this space: N/A

V. CONTACTS

Pre-Implementation Contact(s): anne-e-tayloe.hauswald@cms.hhs.gov, 410-786-4546

Post-Implementation Contact(s): Contact your Contracting Officer’s Technical Representative (COTR) or 

Contractor Manager, as applicable.
VI. FUNDING

Section A: For Fiscal Intermediaries (FIs), Regional Home Health Intermediaries (RHHIs), and/or

Carriers:

No additional funding will be provided by CMS; contractor activities are to be carried out within their operating 

budgets.

Section B: For Medicare Administrative Contractors (MACs)

The Medicare Administrative Contractor is hereby advised that this constitutes technical direction as defined in 

your contract. CMS does not construe this as a change to the MAC Statement of Work. The contractor is not 

obligated to incur costs in excess of the amounts allotted in your contract unless and until specifically 

authorized by the Contracting Officer. If the contractor considers anything provided, as described above, to be 

outside the current scope of work, the contractor shall withhold performance on the part(s) in question and 

immediately notify the Contracting Officer, in writing or by e-mail, and request formal directions regarding 

continued performance requirements. 
Claims Processing Manual

Chapter 17 - Drugs and Biologicals

10 - Payment Rules for Drugs and Biologicals 

(Rev.2368, Issued: 12-15-11; Effective: 01-01-13; Implementation: 01-01-13)

Drugs for inpatient hospital and inpatient skilled nursing facility (SNF) beneficiaries are included in the respective prospective 

payment system (PPS) rates, except for hemophilia clotting factors for hospital inpatients under Part A. 

All hospital outpatient drugs are excluded from SDP because the payment allowance for such drugs is determined by a different 

methodology. Non pass-through drugs with estimated per day costs less than or equal to the applicable drug packaging threshold that 

are furnished to hospital outpatients are packaged under the outpatient prospective payment system (OPPS). Their costs are recognized 

and included but paid as part of the ambulatory payment classification (APC) group payment for the service with which they are 

billed. Non pass-through drugs with estimated per day costs greater than the applicable drug packaging threshold are paid separately. 

Drugs that are granted “pass through” payment status are required by law to be paid at either the amount paid under the physician fee 

schedule, or, if the drug is included in the Part B drug competitive acquisition program (CAP), at the Part B drug CAP rate. Drugs that 

have pass-through status may have coinsurance amounts that are less than 20 percent of the OPPS payment amount. This is because 

pass-through payment amounts, by law, are not subject to coinsurance. CMS considers the amount of the pass-through drug payment 

rate that exceeds the otherwise applicable OPPS payment rate to be the pass-through payment amount. Thus, in situations where the 

pass-through payment rate exceeds the otherwise applicable OPPS payment rate, the coinsurance is based on a portion of the total 

drug payment rate, not the full payment rate. 

Hospitals must report all appropriate HCPCS codes and charges for separately payable drugs, in addition to reporting the applicable 

drug administration codes. Hospitals should also report the HCPCS codes and charges for drugs that are packaged into payments for 

the corresponding drug administration or other separately payable services. Historical hospital cost data may assist with future 

payment packaging decisions for such drugs. Drugs are billed in multiples of the dosage specified in the HCPCS code long descriptor. 

If the drug dose used in the care of a patient is not a multiple of the HCPCS code dosage descriptor, the provider rounds to the next 

highest unit based on the HCPCS long descriptor for the code in order to report the dose provided. 
If the full dosage provided is less than the dosage for the HCPCS code descriptor specifying the minimum dosage for the drug, the 

provider reports one unit of the HCPCS code for the minimum dosage amount. 

OPPS Pricer includes a table of drugs and prices and provides the contractor with the appropriate prices. 

Section 90 relates specifically to billing for hospital outpatients. The remainder of this chapter relates to procedures for pricing and 

paying DME recipients, and to beneficiaries 

who receive drugs under special benefits such as pneumococcal, flu and hepatitis vaccines; clotting factors, immunosuppressive 

therapy, self administered cancer and anti emetic drugs, and drugs incident to physicians‟ services. 

The Medicare Prescription Drug, Improvement, and Modernization Act (MMA) of 2003 defines a Specified Covered Outpatient Drug 

(SCOD) as a covered outpatient drug for which a separate APC has been established and that is either a radiopharmaceutical agent, or 

a drug or biological for which payment was made on a pass-through basis on or before December 31, 2002. Payment for SCODs is set, 

by law, at the average acquisition cost. Under the OPPS, a single payment is made for SCODs that represents payment for both the 

acquisition cost of the drug and any associated pharmacy overhead or nuclear medicine handling costs. 

Drugs or biologicals must meet the coverage requirements in Chapter 15 of the Medicare Benefit Policy Manual. Additionally, for end 

stage renal disease (ESRD) patients, see the Medicare Benefit Policy Manual, Chapter 11. For ESRD patient billing for drugs and 

claims processing, see Chapter 8 of this manual. 

The following chart describes the general payment provisions for drugs.
Table - Drug Payment Methodology 

Key to the following Table: 

NOTES: 

DME MACs do not process claims for blood clotting factors. 

Unless noted otherwise, claims for these drugs are submitted to the local MAC

† - Drugs & biologicals outside the composite rate and/or ESRD PPS are paid as described in 2 below. Those inside the composite rate and/or ESRD PPS are 

paid as described in 1. (ESRD PPS effective January 1, 2011)

1 - Included in PPS rate, or other provider-type all inclusive encounter rate

2 - Price taken from CMS drug/biological pricing file effective on the specific date of service

3 - Based on reasonable cost (101% reasonable cost in CAH)

4 - Lower of cost or 95% AWP paid for drug in addition to PPS rate, or in addition to reasonable cost if excluded from PPS 

5 - OPPS-APC, whether pass-thru drug or not 

6 - Cannot furnish as that “provider” type

7 - May not bill DME-MAC or MAC for drugs furnished incident-to a physicians’ service

8 - Payment made at the time of cost settlement

A - Bills are submitted to the DME MAC

++ Except in the State of Washington, where CMS permits the ESRD Facility to bill for immunosuppressive drugs due to the unique State assistance to the 

beneficiary provided only via the ESRD Facility.

Provider/Drug Hepatitis B 

Vaccine 

Pneumococcal 

& Influenza

Vaccines 

Hemophilia 

Clotting 

Factors 

Immuno -

Suppressive 

Erythropoiesis 

Stimulating 

Agents 

(ESA’s) 

Self Admin 

Anti-Cancer 

Anti-Emetic

for cancer 

treatment

Other Drugs 

Hospital Inpatient (IP) A -Prospective 

Payment System (IPPS) 

3 3 2 1 1 1 1 

Hospital IP A - not IPPS 3 3 3 3 3 3 3 

Hospital Outpatient Prospective Payment 

System (OPPS) 

3 3 3 5 (30 day 

supply)

5 5 5 

Skilled Nursing Facility (SNF) IP 3 3 1 1 1 1 1 

SNF OP or IP B 3 3 3 3 6 6 6 

End Stage Renal Disease (ESRD) Facility 2 2 6 6++ 1 or 2† 6 1 or 2† 

Comprehensive Outpatient Rehabilitation 

Facility (CORF)/ Outpatient Rehabilitation 

Facility (ORF) 

2 2 6 6 6 6 6 

Community Mental Health Center (CMHC) 6 6 6 6 6 6 6

Rural Health Clinical (RHC)/Federally 1 8 5 5 5 5 5 
Qualified Health Clinic (FQHC) -hospital 

based

RHC/FQHC-independent 1 8 6 6 6 6 6 

Home Health Agencies (HHA) 3 3 6 6 6 6 6 (except for 

osteoporosis)

Hospice 6 6 6 6 1 1 1 

Physicians 2 2 2 2 2 2 2 

Pharmacy 2 2 2 ,7 2, A 2 2, A 2 ,7

Durable Medical Equipment, Prosthetics, 

Orthotics, and Supplies (DMEPOS) Supplier 

2 2 2 2 2 2 2 

Critical Access Hospital (CAH) IP or OP 

Method I or II

3 3 3 3 3 3 3 

NOTES: 

Independent and provider-based RHCs and FQHCs generally do not bill for pneumococcal/influenza vaccines, except when the only service involved is the 

administration of the vaccine. Instead, RHCs/FQHCs are generally paid for pneumococcal/influenza vaccines at cost settlement via the Medicare cost report.

Hepatitis B vaccine payment is bundled into the encounter rate for both Independent and provider-based RHCs and FQHCs.

Influenza, pneumococcal, and Hepatitis B vaccines are paid on a reasonable cost basis in a hospital outpatient department. Neither deductible nor coinsurance 

apply. 

HHAs cannot bill for vaccines, except on TOB 34X, since vaccines are not part of the HH benefit and cannot be paid under HH PPS. 

Influenza, PPV, and Hepatitis B vaccines are paid once for the vaccine and once for the administration of the vaccine. The provider or supplier (including 

physician) must enter each of the HCPCS on separate lines of the claim. 

A Part B blood clotting factor claim from a Part B supplier is processed by the Local Part B Carrier. 

A Part A blood clotting factor claim from a Part A provider, including a hospital-based hemophilia center, is processed by the hospital’s Medicare contractor.
20.1.3 – Exceptions to Average Sales Price (ASP) Payment Methodology 

(Rev.2368, Issued: 12-15-11; Effective: 01-01-13; Implementation: 01-01-13)

The payment allowance limits for blood and blood products (other than blood clotting factors) 

that are not paid on a reasonable charge or prospective payment basis, are determined in the 

same manner the payment allowance limits were determined on October 1, 2003. Specifically, 

the payment allowance limits for blood and blood products are 95 percent of the average 

wholesale price (AWP) as reflected in the published compendia. The payment allowance limits 

will be updated on a quarterly basis. Blood and blood products furnished in the hospital 

outpatient department are paid under OPPS at the amount specified for the Ambulatory Payment 

Classification (APC) to which the product is assigned. 

The payment allowance limits for infusion drugs furnished through a covered item of durable 

medical equipment on or after January 1, 2005, will continue to be 95 percent of the AWP 

reflected in the published compendia as of October 1, 2003, unless the drug is compounded or 

the drug is furnished incident to a professional service. The payment allowance limits for 

infusion drugs furnished through a covered item of durable medical equipment that were not 

listed in the published compendia as of October 1, 2003, (i.e., new drugs) are 95 percent of the 

first published AWP unless the drug is compounded or the drug is furnished incident to a 

professional service. 

The payment allowance limits for influenza, Pneumococcal and Hepatitis B vaccines are 95 

percent of the AWP as reflected in the published compendia except where the vaccine is 

furnished in a hospital outpatient department. Where the vaccine is administered in the hospital 

outpatient department, the vaccine is paid at reasonable cost. CMS will supply contractors with 

the payment allowance limits annually to be effective on September 1 of each year. Contractors 

will be notified of the availability of this file via a Recurring Update Notification. 

The payment allowance limits for drugs and biologicals that are not included in the ASP 

Medicare Part B Drug Pricing File or Not Otherwise Classified (NOC) Pricing File, other than 

new drugs that are produced or distributed under a new drug application (or other application) 

approved by the Food and Drug Administration, are based on the published Wholesale 

Acquisition Cost (WAC) or invoice pricing, except under OPPS where the payment allowance 

limit is 95 percent of the published AWP. In determining the payment limit based on WAC, the 

contractors follow the methodology specified in Publication. 100-04, Chapter 17, Drugs and 

Biologicals, for calculating the AWP, but substitute WAC for AWP. The payment limit is 106

percent of the lesser of the lowest-priced brand or median generic WAC. 

Carriers, DME MACs, and A/B MACs shall develop payment allowance limits for covered 

drugs when CMS does not supply the payment allowance limit on the ASP drug pricing file. At 

the contractors‟ discretion, contractors may contact CMS to obtain payment limits for drugs not 

included in the quarterly ASP or NOC files or otherwise made available by CMS on the CMS 

Web site. If the payment limit is available from CMS, contractors will substitute CMS-provided 

payment limits for pricing based on WAC or invoice pricing. CMS will provide the payment 
limits either directly to the requesting contractor or via posting an MS Excel file on the CMS 

Web site. 

The payment allowance limits for new drugs and biologicals that are produced or distributed 

under a new drug application (or other new application) approved by the Food and Drug 

Administration, and that are not included in the ASP Medicare Part B Drug Pricing File or Not 

Otherwise Classified (NOC) Pricing File, are based on 106 percent of the WAC, or invoice 

pricing if the WAC is not published, except under OPPS where the payment allowance limit is 

95 percent of the published AWP. This policy applies only to new drugs that were first sold on or 

after January 1, 2005. At the contractors‟ discretion, contractors may contact CMS to obtain 

payment limits for new drugs not included in the quarterly ASP or NOC files or otherwise made 

available by CMS on the CMS Web site. If the payment limit is available from CMS, contractors 

will substitute CMS-provided payment limits for pricing based on WAC or invoice pricing. CMS 

will provide the payment limits either directly to the requesting contractor or via posting an MS 

Excel file on the CMS Web site. 

The payment allowance limits for radiopharmaceuticals are not subject to ASP. Carriers should 

determine payment limits for radiopharmaceuticals based on the methodology in place as of 

November 2003 in the case of radiopharmaceuticals furnished in other than the hospital 

outpatient department. Refer to Chapter 17, §90.2 of the manual regarding radiopharmaceuticals 

furnished in the hospital outpatient department.