a

GAO

United States Government Accountability Office

Report to Congressional Committees

October 2004 MEDICARE

Appropriate 

Dispensing Fee 

Needed for Suppliers 

of Inhalation Therapy 

Drugs

GAO-05-72
What GAO Found

United States Government Accountability Office

Why GAO Did This Study

Highlights

Accountability Integrity Reliability

www.gao.gov/cgi-bin/getrpt?GAO-05-72.

To view the full product, including the scope 

and methodology, click on the link above. 

For more information, contact Laura A. 

Dummit at (202) 512-7119. 

Highlights of GAO-05-72, a report to 

congressional committees 

October 2004

MEDICARE

Appropriate Dispensing Fee Needed for 

Suppliers of Inhalation Therapy Drugs 

Using cost data obtained from 12 inhalation therapy suppliers that 

accounted for more than 42 percent of 2003 Medicare inhalation therapy 

payments, GAO found that 2003 acquisition costs for the three inhalation 

therapy drugs representing approximately 98 percent of Medicare inhalation 

therapy drug expenditures varied widely. For example, per unit acquisition 

costs for ipratropium bromide, the inhalation therapy drug with the highest 

Medicare expenditures, ranged from $0.23 to $0.64. Although costs varied, 

they were not always lower for the 4 largest suppliers. The lowest 

acquisition cost for ipratropium bromide was obtained by one of the small 

suppliers, and the highest by one of the large suppliers. GAO estimated that 

the 2003 Medicare payment rate per patient, per month was between $119 to 

$129 higher than suppliers’ acquisition costs for a typical monthly supply of 

albuterol sulfate and between $162 to $187 higher for a typical monthly 

supply of ipratropium bromide. 

GAO estimated 2003 per patient monthly dispensing costs of $7 to $204 for 

the 12 inhalation therapy suppliers, which included patient care costs, such 

as pharmacy and shipping, and administrative and overhead costs, such as 

billing. Large suppliers did not necessarily have lower dispensing costs. 

Because Medicare payments for drugs have been much higher than 

suppliers’ acquisition costs, suppliers indicated they were able to provide 

services that benefited both beneficiaries and their physicians, a fact that 

raises questions about the services necessary to dispense inhalation therapy 

drugs. For example, several suppliers reported that they incur substantial 

costs to ship drugs overnight to beneficiaries; most did so on an as-needed 

basis, although one did so routinely. All suppliers in GAO’s sample made 

phone calls to beneficiaries to ask them if they needed medication refills, to 

coordinate a refill delivery, and to check on the beneficiaries’ compliance 

with their prescribed drug regimens. Most suppliers made these calls on a 

monthly basis, but one reported that it did so twice a month. 

The Medicare Prescription Drug, 

Improvement, and Modernization 

Act of 2003 (MMA) revised the 

payment formula for most of the 

outpatient drugs, including 

inhalation therapy drugs, covered 

under Medicare part B. Under the 

revised formula, effective 2005, 

Medicare’s payment is intended to 

be closer to acquisition costs. The 

Centers for Medicare & Medicaid 

Services (CMS), the agency that 

administers Medicare, also pays 

suppliers of inhalation therapy 

drugs a $5 per patient per month 

dispensing fee. Suppliers have 

raised concerns that once drug 

payments are closer to acquisition 

costs, they will no longer be able to 

use overpayments on drugs to 

subsidize dispensing costs, which 

they state are higher than $5. As 

directed by MMA, GAO 

(1) examined suppliers’ acquisition 

costs of inhalation therapy drugs 

and (2) identified costs to suppliers 

of dispensing inhalation therapy 

drugs to Medicare beneficiaries. 

What GAO Recommends

GAO recommends that the 

Administrator of CMS evaluate the 

costs of dispensing inhalation 

therapy drugs and modify the 

dispensing fee, if warranted, to 

ensure that the fee appropriately 

accounts for the costs necessary to 

dispense the drugs. CMS agreed 

with GAO’s recommendation. 
Page i GAO-05-72 Medicare Payment for Inhalation Therapy

Contents

Letter 1

Background 3

Results in Brief 5

Suppliers’ Acquisition Costs Of Inhalation Therapy Drugs Varied 

Widely 6

Large Variation In Suppliers’ Dispensing Costs Raises Questions 

About Services Necessary To Dispense Inhalation 

Therapy Drugs 8

Conclusions 11

Recommendation for Executive Action 12

Agency and External Reviewer Comments 12

Appendixes

Appendix I: Scope and Methodology 15

Appendix II: Comments From the Centers for Medicare & Medicaid 

Services 18

Tables Table 1: Supplier Per Unit Acquisition Costs for Selected Inhalation 

Therapy Drugs by Size of Supplier, 2003 7

Table 2: Estimated Per Patient Monthly Inhalation Therapy Drug 

Dispensing Costs, 2003 9

Table 3: Estimated Inhalation Therapy Drug Dispensing Costs, Per 

30-Day and 90-Day Supply, 2003 11

Abbreviations

AAHomecare American Association for Homecare

ASP average sales price

AWP average wholesale price

CMS Centers for Medicare & Medicaid Services

DME durable medical equipment

MMA Medicare Prescription Drug, Improvement, and 

Modernization Act of 2003

VA Department of Veterans Affairs
Page ii GAO-05-72 Medicare Payment for Inhalation Therapy

This is a work of the U.S. government and is not subject to copyright protection in the 

United States. It may be reproduced and distributed in its entirety without further 

permission from GAO. However, because this work may contain copyrighted images or 

other material, permission from the copyright holder may be necessary if you wish to 

reproduce this material separately.
Page 1 GAO-05-72 Medicare Payment for Inhalation Therapy

United States Government Accountability Office

Washington, D.C. 20548

A

October 12, 2004 Letr

Congressional Committees

In response to substantial Medicare overpayments for outpatient drugs,1

Congress enacted a revised payment formula in the Medicare Prescription 

Drug, Improvement, and Modernization Act of 2003 (MMA) beginning 

January 1, 2005.2

 For the limited number of drugs covered under part B of 

the Medicare program,3 payments had been substantially higher than 

acquisition costs generally available to the suppliers of the drugs. Under 

the revised payment formula, Medicare’s payment is intended to be much 

closer to acquisition costs.

Medicare-covered outpatient drugs include those that are an integral and 

necessary part of covered durable medical equipment (DME), such as 

those delivered through nebulizers for inhalation therapy.4

 The Centers for 

Medicare & Medicaid Services (CMS), the agency that administers 

Medicare, makes three separate payments for inhalation therapy. 

Inhalation therapy drug suppliers, which are required to be licensed 

pharmacies,5

 receive a payment for the drug as well as a per patient 

monthly dispensing fee of $5 for costs such as pharmacy, shipping, and 

billing. In addition, Medicare pays for the nebulizer and the supplies 

associated with it. Suppliers have stated that payments for inhalation 

therapy drugs, which have been higher than the prices suppliers paid to 

purchase them, have helped subsidize monthly dispensing costs. They 

have raised concerns that once drug payments are closer to acquisition 

costs, they will no longer be able to cover their current dispensing costs. 

1

H.R. Conf. Rep. No. 108-391, at 582-84 (2003), reprinted in 2003 U.S.C.C.A.N. 1808, 1950-51.

2

Pub. L. No. 108-173, § 303, 117 Stat. 2066, 2233-55 (2003).

3

Medicare part B provides coverage for certain physician, outpatient hospital, laboratory, 

and other services to beneficiaries who pay monthly premiums.

4

A nebulizer is a device driven by a compressed air machine. It allows the patient to take 

medication in the form of a mist (wet aerosol) more directly into the lungs. 

5

42 C.F.R. § 424.57(b)(4) (2003).
Page 2 GAO-05-72 Medicare Payment for Inhalation Therapy

MMA directed us to study the adequacy of Medicare’s payment for 

inhalation therapy.6

 Specifically, we (1) examined suppliers’ acquisition 

costs of inhalation therapy drugs and (2) identified costs to suppliers of 

dispensing inhalation therapy drugs to Medicare beneficiaries.

To address these issues, we analyzed 2003 cost and utilization data 

collected from 12 inhalation therapy suppliers. We assessed the reliability 

of the supplier-reported data by comparing certain data elements for 

consistency with information from Securities and Exchange Commission 

annual reports for publicly traded companies, data from a similar 2003 

industry study, and the 2003 Medicare DME claims, the latest claims data 

available. We found these data suitable for our purposes. Our sample of

12 suppliers accounted for more than 42 percent of Medicare inhalation 

therapy payments in 2003. From the supplier-reported cost data, we 

calculated per unit acquisition costs (net of rebates and discounts) for the 

three inhalation therapy drugs most frequently billed to Medicare, 

representing approximately 98 percent of Medicare inhalation therapy drug 

expenditures in 2003. We also calculated per patient monthly dispensing 

costs, which include patient care costs, such as pharmacy and shipping, 

and administrative and overhead costs, such as billing. We reported the 

range of these costs across all 12 suppliers and separately for the 4 largest 

suppliers in our sample, each of which had payments accounting for at 

least 3 percent of all Medicare inhalation therapy payments in 2003, and all 

other suppliers in our sample, which we refer to as small suppliers. 

We interviewed officials from CMS; three DME regional carriers, the 

contractors responsible for processing and paying DME and inhalation 

therapy drug claims; and the Department of Veterans Affairs (VA) to gather 

comparative information on how VA pays for inhalation therapy. We also 

interviewed officials from an industry association representing suppliers; 

two patient advocacy organizations; two associations of health care 

professionals who care for inhalation therapy patients; and two 

manufacturers and a wholesaler of inhalation therapy drugs. These 

interviewees helped us identify 20 inhalation therapy suppliers 

representing national, regional, and local homecare and mail-order 

pharmacies of various sizes and geographic locations. Appendix I contains 

6

Pub. L. No. 108-173, § 305(b), 117 Stat. 2066, 2255-56 (2003). MMA specified that this report 

was to be issued no later than 1 year after the date of enactment, December 8, 2003. This 

report may inform CMS as it is considering Medicare payments for inhalation therapy drug 

suppliers.
Page 3 GAO-05-72 Medicare Payment for Inhalation Therapy

a more complete description of our methodology. We conducted our work 

from May through October 2004 in accordance with generally accepted 

government auditing standards.

Background Inhalation therapy consists of drugs, including bronchodialators such as 

albuterol sulfate, taken through a nebulizer to alleviate severe respiratory 

problems. In the Medicare population, this therapy is primarily used to 

treat chronic obstructive pulmonary disease, which includes diseases such 

as asthma, emphysema, and chronic bronchitis. Once beneficiaries begin 

receiving inhalation therapy, they are likely to receive it for the remainder 

of their lives. 

Inhalation therapy drugs are covered by Medicare because the nebulizer, 

which is covered as DME, is only useful in conjunction with the drugs. 

Under the DME benefit, Medicare payment for nebulizers covers the cost to 

suppliers of purchasing the equipment, delivering it to the beneficiary, and 

ensuring that the beneficiary knows how to use and care for the equipment. 

Medicare regulations specify that DME suppliers must document that they 

or another qualified party provided the beneficiary with the necessary 

information and instructions on using the equipment, but suppliers do not 

have to provide that education themselves.7

 DME suppliers receive no 

additional payment if they provide the patient education; however, 

physicians can bill Medicare if they or their staff provide the patient 

training. 

MMA changed Medicare’s payment method beginning in 2005 for most 

drugs covered under part B, including inhalation therapy drugs, from one 

based on the average wholesale price (AWP)8

 to one based primarily on the 

average sales price (ASP)9 plus 6 percent. This new payment method is 

expected to result in payment rates that are closer to drug acquisition

7

42 C.F.R. § 424.57(c)(12) (2003).

8

Often described as a “sticker price” or “list price,” AWP is the average price that a 

manufacturer suggests wholesalers charge pharmacies.

9

ASP is defined for each drug as a manufacturer’s sales to all purchasers in a given quarter, 

net of discounts and rebates and excluding certain government and other purchasers, 

divided by the total number of units of the drug sold by the manufacturer in that quarter. 

Pub. L. No. 108-173, § 303(c), 117 Stat. 2066, 2240-41 (2003).
Page 4 GAO-05-72 Medicare Payment for Inhalation Therapy

costs.10 The change was in response to substantial Medicare overpayments 

for outpatient drugs. For example, in a 2001 report, we found that the 

widely available acquisition prices for the two most common inhalation 

therapy drugs were 15 and 22 percent of AWP,11 while payment was 95 

percent of AWP.12 

Although most Medicare-covered outpatient drugs are provided in a 

physician’s office, inhalation therapy drugs are different. A physician 

prescribes the drugs, but beneficiaries receive the drugs from inhalation 

therapy drug suppliers, such as homecare companies and mail-order and 

retail pharmacies. The four largest suppliers are for-profit homecare 

companies that accounted for almost 41 percent of Medicare inhalation 

therapy payments in 2003. In addition to supplying the drugs, most 

companies also provide beneficiaries with a nebulizer and other related 

supplies. 

Under the AWP-based payment system, suppliers received drug payments 

that were substantially higher than their acquisition costs. Suppliers 

indicated that they used these excess payments to offer services that 

benefited both beneficiaries and their physicians, such as shipping the 

drugs overnight, making monthly phone calls to remind beneficiaries to 

refill their prescriptions, and operating 24-hour hotlines to respond to 

beneficiary questions.13 Several inhalation therapy suppliers and two 

physician organizations we spoke with indicated that suppliers also used 

excess payments to market their services to physicians to gain market 

share. 

Currently, Medicare pays a dispensing fee of $5 monthly per patient for 

inhalation therapy drugs. In August 2004, CMS published a proposed rule 

in which the agency noted that it believed a dispensing fee is appropriate to 

cover a supplier’s costs in delivering inhalation therapy drugs to patients, 

although it did not propose a specific dollar amount for 2005. CMS 

solicited comments on the services and costs associated with providing 

10H.R. Conf. Rep. No. 108-391, at 582-84 (2003), reprinted in 2003 U.S.C.C.A.N. 1808, 1950-51.

11GAO, Medicare: Payments for Covered Outpatient Drugs Exceed Providers’ Cost, GAO01-1118 (Washington, D.C.: Sept. 21, 2001).

12In implementing MMA, CMS set payments for inhalation therapy drugs furnished in 2004 at 

80 to 85 percent of AWP.

13These services are not required by Medicare.
Page 5 GAO-05-72 Medicare Payment for Inhalation Therapy

inhalation therapy drugs and an appropriate amount for such a dispensing 

fee.14 In addition, CMS proposed to allow suppliers to dispense a 90-day 

supply of drugs to Medicare beneficiaries, an increase from the current 

limit of a 30-day supply.15 A final rule is scheduled for publication in 

November 2004. 

Results in Brief The 2003 acquisition costs for the three inhalation therapy drugs most 

frequently billed to Medicare varied widely. For example, per unit 

acquisition costs for ipratropium bromide, the inhalation therapy drug with 

the highest Medicare expenditures, ranged from $0.23 to $0.64. In addition, 

acquisition costs were not always lower for the largest suppliers. The 

lowest acquisition cost for ipratropium bromide was obtained by one of the 

small suppliers, and the highest acquisition cost was obtained by one of the 

large suppliers. For the two drugs for which we could estimate an average 

monthly supply cost, the 2003 acquisition costs were considerably lower 

than the 2003 Medicare payment rates, resulting in substantial excess 

payments.

We estimated per patient monthly dispensing costs ranging from $7 to $204 

for the suppliers in our sample. In addition, large suppliers did not 

necessarily have lower dispensing costs. Some of the variation may be due 

to the range of services offered by suppliers, which raises questions about 

the services necessary to dispense inhalation therapy drugs. For example, 

several suppliers reported that they incur substantial costs to ship drugs 

overnight to beneficiaries; most did so on an as-needed basis, although one 

did so routinely. Because Medicare payments for drugs have been much 

higher than suppliers’ acquisition costs, suppliers indicated they were able 

to provide services that benefited both beneficiaries and their physicians. 

We found that dispensing a 90-day, rather than a 30-day, supply of drugs 

would reduce overall dispensing costs; the cost of dispensing a 90-day 

supply was less than twice the cost of a 30-day supply.

We recommend that the Administrator of CMS evaluate the costs of 

dispensing inhalation therapy drugs and modify the dispensing fee, if 

warranted, to ensure that the fee appropriately accounts for the costs 

necessary to dispense the drugs. In commenting on a draft of this report, 

1469 Fed. Reg. 47,488, 47,549 (2004).

1569 Fed. Reg. 47,488, 47,549 (2004).
Page 6 GAO-05-72 Medicare Payment for Inhalation Therapy

CMS agreed with our recommendation. An industry representative 

commenting on a draft of this report also agreed with our recommendation.

Suppliers’ Acquisition 

Costs Of Inhalation 

Therapy Drugs Varied 

Widely

We found that 2003 per unit acquisition costs for the three inhalation 

therapy drugs most frequently billed to Medicare varied widely among the 

12 suppliers in our sample (see table 1). For ipratropium bromide, 

excluding the 3 suppliers with the highest costs and the 3 with the lowest 

costs, the remaining 6 suppliers in our sample had acquisition costs that 

ranged from $0.26 to $0.44. For albuterol sulfate, excluding the 3 suppliers 

with the highest costs and the 3 with the lowest costs, the remaining 

6 suppliers had costs that ranged from $0.05 to $0.06. Although costs 

varied, they were not always lower for large suppliers. For example, the 

lowest acquisition cost for ipratropium bromide was obtained by one of the 

small suppliers, and the highest acquisition cost was obtained by one of the 

large suppliers. Because the three primary drugs used in inhalation therapy 

are available as generic drugs, purchasers may choose from more than one 

source to buy these drugs, potentially leading to greater competition and 

lower prices.
Page 7 GAO-05-72 Medicare Payment for Inhalation Therapy

Table 1: Supplier Per Unit Acquisition Costs for Selected Inhalation Therapy Drugs 

by Size of Supplier, 2003

Source: GAO analysis of data from 12 inhalation therapy suppliers.

Note: A large supplier is one whose payments were at least 3 percent of all Medicare inhalation 

therapy payments in 2003.

a

These costs are for generic albuterol sulfate and do not include the costs of Xopenex®, a brand-name 

form of albuterol sulfate.

b

Budesonide is also available in a powder form, which is much less costly than the solution form of the 

drug. The lower cost suppliers could have purchased the powder form of the drug and compounded it 

into the solution themselves. 

Industry representatives we spoke with stated that, typically, inhalation 

therapy drug suppliers purchase drugs from wholesalers or distributors. 

We found that three of the four large suppliers in our sample purchased 

inhalation therapy drugs directly from manufacturers. For these 

companies, the large volume of drugs that they purchase may have allowed 

them to receive competitive prices negotiated directly with manufacturers, 

avoiding any price markups from wholesalers. The other large supplier 

purchased drugs from a mail-order pharmacy that is also an inhalation 

therapy drug supplier. Most of the small suppliers in our sample stated that 

they purchased their drugs from a wholesaler or distributor, and a few 

indicated they used group purchasing organizations to negotiate prices 

with manufacturers. Two small inhalation therapy suppliers stated they 

purchased their drugs from both manufacturers and distributors, one 

noting that they use different sources for different drugs. 

Suppliers Range of per unit average acquisition cost 

Ipratropium bromide

All (n=12) $0.23 - $0.64

Large (n=4) 0.26 - 0.64

Small (n=8) 0.23 - 0.46

Albuterol sulfatea

All (n=12) $0.04 - $0.08

Large (n=4) 0.04 - 0.06

Small (n=8) 0.05 - 0.08

Budesonideb

All (n=12) $0.04 - $4.35

Large (n=4) 0.04 - 3.69

Small (n=8) 0.24 - 4.35
Page 8 GAO-05-72 Medicare Payment for Inhalation Therapy

Under the previous AWP-based payment system, there was a considerable 

difference between the prices widely available to purchasers and 

Medicare’s payment for the drugs. Using the lowest and highest per unit 

acquisition costs reported by our suppliers for 2003, we estimated a 

difference of $119 to $129 per patient, per month between what suppliers 

received in payment from Medicare at a rate of 95 percent of AWP and the 

acquisition costs they incurred for a typical monthly supply of albuterol 

sulfate. For ipratropium bromide, we estimated that the difference 

between the 2003 payment rate and lowest and highest acquisition costs 

was $162 to $187 per patient per month for a typical monthly supply. 

Because patients receiving inhalation therapy may receive more than one 

inhalation therapy drug, the excess payments to suppliers for many 

patients would have been larger. 

Large Variation In 

Suppliers’ Dispensing 

Costs Raises Questions 

About Services 

Necessary To Dispense 

Inhalation Therapy 

Drugs 

Among the suppliers in our sample, there was wide variation in the monthly 

costs associated with dispensing inhalation therapy drugs. We also found 

that larger suppliers did not necessarily have lower dispensing costs. 

Because Medicare payments for drugs greatly exceeded suppliers’ 

acquisition costs, suppliers indicated they were able to provide services 

that benefited both beneficiaries and their physicians. For example, while 

most suppliers stated that they shipped drugs overnight to beneficiaries on 

an as-needed basis, one supplier reported doing so routinely. We found that 

providing a 90-day supply of drugs could reduce suppliers’ costs; the cost 

for dispensing a 90-day supply was less than twice the cost for dispensing a 

30-day supply.

Total per patient monthly dispensing costs varied widely among the 

suppliers in our sample. Using 2003 data obtained from 12 inhalation 

therapy suppliers, we estimated that the cost of dispensing inhalation 

therapy drugs ranged from $7 to $204 per patient per month. Excluding the 

3 suppliers with the highest and the 3 with the lowest dispensing costs, the 

remaining 6 suppliers in our sample had estimated dispensing costs that 

ranged from $53 to $116 per patient per month. Large inhalation therapy 

drug suppliers did not necessarily realize economies for inhalation therapy 

drug dispensing costs; estimated per patient monthly costs ranged from $53 

to $138 for large suppliers and from $7 to $204 for small suppliers. 

The estimated per patient monthly costs for each individual dispensing cost 

category varied widely across suppliers, with some suppliers incurring 

much higher costs than others (see table 2). Examples of substantial costs 

that suppliers incurred in dispensing inhalation therapy drugs include 
Page 9 GAO-05-72 Medicare Payment for Inhalation Therapy

patient care services, such as pharmacy, packaging and shipping, personal 

delivery, and medication refill and compliance phone calls, as well as 

billing and collection costs and bad debt. 

Table 2: Estimated Per Patient Monthly Inhalation Therapy Drug Dispensing Costs, 

2003

Source: GAO analysis of data from 12 suppliers.

a

Other patient care costs as reported by the suppliers in our sample included customer service 

representatives not included in another cost category and purchasing personnel. 

b

Other administrative and overhead costs as reported by the suppliers in our sample included costs 

such as office supplies and equipment, including computers; interest expenses; and building and 

equipment maintenance. 

The wide range of costs associated with dispensing inhalation therapy 

drugs is due in part to the variation in services offered by suppliers. 

Because of the difference between the acquisition prices of the drugs and 

Medicare’s payment for them, suppliers indicated that they were able to 

incur the costs associated with providing services that benefited both 

beneficiaries and their physicians. For example, 10 of 12 suppliers in our 

sample reported that they compounded at least some prescriptions,16 for 

Cost Category Range of per patient monthly costs

Patient care costs

Pharmacy $0.10 - $123.73

Packaging and shipping 0.32 - 32.61

Delivery 0.00 - 17.39

Medication refill and compliance phone calls 0.12 - 17.64

Other patient carea 0.00 - 24.04

Administrative and overhead costs

Billing/collection $2.00 - $9.68

Rent/mortgage/lease/or other payment for space 0.26 - 7.19

Insurance 0.00 - 4.10

Depreciation 0.28 - 3.88

Utilities 0.13 - 3.67

Storage 0.00 - 2.96

Licensing 0.06 - 2.39

Training 0.00 - 0.80

Taxes 0.00 - 30.92

Bad debt 0.00 - 9.28

Other administrative and overheadb 0.21 - 29.84
Page 10 GAO-05-72 Medicare Payment for Inhalation Therapy

which they may have incurred additional costs, including maintenance of a 

sterile compounding room and increased pharmacist labor. However, the 2 

suppliers in our sample that did not compound drugs did not have the 

lowest pharmacy costs among all suppliers. All suppliers in our sample 

made phone calls to beneficiaries to ask them if they needed medication 

refills, to coordinate a refill delivery, and to check on the beneficiaries’ 

compliance with their prescribed drug regimens. Most suppliers made 

these calls on a monthly basis, but one reported that it did so twice a 

month. Several suppliers reported that they incurred substantial costs to 

ship drugs overnight to beneficiaries; most did so on an as-needed basis, 

although one supplier did so routinely. In addition, several suppliers 

maintained a 24-hour on-call service for patients to speak to a trained 

clinician or technician with questions or problems. Inhalation therapy 

suppliers we spoke with reported that one of their largest costs was the 

cost of respiratory therapists, who often provide initial patient education 

and are available as a clinical resource for medication refill and compliance 

phone calls. Respiratory therapist costs associated with teaching patients 

about the use and care of a nebulizer are covered as a patient education 

cost under Medicare’s payment for the equipment. Therefore, in our 

analysis we excluded respiratory therapist costs for patient education on 

the use of the nebulizer, but included respiratory therapist costs for 

medication refill and compliance phone calls. 

CMS has proposed to allow pharmacy suppliers to dispense Medicare 

beneficiaries a 90-day, rather than a 30-day, supply of inhalation therapy 

drugs.17 We determined that the cost to dispense a 90-day supply of drugs is 

less than twice the cost to dispense a 30-day supply of drugs (see table 3).18 

This is because certain costs, such as pharmacy, shipping, and billing, are 

incurred only when the drugs are dispensed; therefore, less frequent 

dispensing would lower overall costs.19 For example, suppliers would bill 

16Drug compounding is the process of mixing, combining, or altering ingredients to create a 

customized medication for an individual patient.

1769 Fed. Reg. 47,488, 47,549 (2004).

18To calculate per patient dispensing costs for a 90-day supply, we included a one-time cost 

for pharmacy, packaging and shipping, delivery, medication compliance and refill phone 

calls, other patient care, and billing and collection costs. We tripled each suppliers’ reported 

monthly costs for all other administrative and overhead costs.

19In contrast, administrative and overhead costs generally are not dependent on the 

frequency with which the drugs are dispensed.
Page 11 GAO-05-72 Medicare Payment for Inhalation Therapy

Medicare only once for a 90-day supply of drugs, whereas they would have 

to bill Medicare three times over that same period if they were dispensing a 

30-day supply to beneficiaries. Allowing for a 90-day supply of drugs could 

reduce both Medicare’s and suppliers’ costs because suppliers could 

dispense, ship, and bill for drugs less frequently and Medicare would 

process fewer claims. 

Table 3: Estimated Inhalation Therapy Drug Dispensing Costs, Per 30-Day and 90-

Day Supply, 2003

Source: GAO analysis of data from 12 suppliers.

a

To calculate per patient dispensing costs for a 90-day supply, we included a one-time cost for 

pharmacy, packaging and shipping, delivery, medication compliance and refill phone calls, other 

patient care, and billing and collection costs. We tripled each suppliers’ reported monthly costs for all 

other administrative and overhead costs.

Conclusions The inhalation therapy suppliers in our sample exhibited a wide range of 

drug acquisition costs. The suppliers’ costs of dispensing inhalation 

therapy drugs were quite variable as well. Higher dispensing costs incurred 

by some suppliers were covered by the excess payments for these drugs 

under the AWP-based payment system. Our analysis gives a range of the 

costs suppliers were incurring for dispensing inhalation therapy drugs, a 

starting point for determining a dispensing fee amount. The appropriate 

amount of a Medicare dispensing fee must take into account how excess 

payments for drugs affected dispensing costs. Some costs incurred by 

suppliers are necessary to dispense inhalation therapy drugs to Medicare 

beneficiaries, for example, maintaining a licensed pharmacy and billing 

Medicare. These necessary costs may no longer be covered when Medicare 

drug payments are closer to acquisition costs with the implementation of 

the ASP-based payment system. Other costs suppliers incurred may not be 

necessary to dispense the drugs.

Duration of Supply Range of costs

Per patient 30-day costs with 30-day supply $6.96 - $203.75

Per patient 90-day costs with 90-day supplya 12.61 - 267.91
Page 12 GAO-05-72 Medicare Payment for Inhalation Therapy

Recommendation for 

Executive Action

We recommend that the Administrator of CMS evaluate the costs of 

dispensing inhalation therapy drugs and modify the dispensing fee, if 

warranted, to ensure that the fee appropriately accounts for the costs 

necessary to dispense the drugs.

Agency and External 

Reviewer Comments

In commenting on a draft of this report, CMS agreed with our 

recommendation. CMS noted the variation we found in inhalation therapy 

suppliers’ costs of dispensing these drugs to Medicare beneficiaries and 

stated it would carefully consider our analysis as it determines an 

appropriate dispensing fee for 2005. CMS stated that it would work with 

those concerned with inhalation therapy to understand the variability in 

dispensing costs. The agency also acknowledged the variation in the 

acquisition costs of inhalation therapy drugs. CMS noted our finding that 

acquisition costs were not necessarily related to the size of the supplier and 

stated it intends to further explore the factors influencing drug acquisition 

costs. CMS’s written comments appear in appendix II. 

We received oral comments on a draft of this report from the American 

Association for Homecare (AAHomecare), which represents homecare 

companies, including those that provide inhalation therapy drugs. The 

association agreed with our recommendation. AAHomecare noted that 

respiratory therapists provide services that are associated with dispensing 

inhalation therapy drugs, as well as with the use of nebulizers, and, 

therefore, the exclusion of all costs associated with respiratory therapists 

from our analysis was not appropriate. We have clarified the discussion of 

our methodology to indicate that we excluded respiratory therapist costs 

related to patient education on the use of the nebulizer but we included 

respiratory therapist costs related to the medication refill and compliance 

phone calls. AAHomecare also made technical comments, which we 

incorporated where appropriate. 

We are sending a copy of this report to the Administrator of CMS and 

appropriate congressional committees. We will also make copies available 

to others on request. The report is available at no charge on GAO’s Web site 

at http://www.gao.gov. 
Page 13 GAO-05-72 Medicare Payment for Inhalation Therapy

If you or your staffs have any questions, please call me at (202) 512-7119 or 

Nancy A. Edwards at (202) 512-3340. Other major contributors to this 

report include Beth Cameron Feldpush, Joanna L. Hiatt, and Andrea E. 

Richardson. 

Laura A. Dummit

Director, Health Care—Medicare Payment Issues
Page 14 GAO-05-72 Medicare Payment for Inhalation Therapy

List of Committees

The Honorable Charles E. Grassley

Chairman

The Honorable Max Baucus

Ranking Minority Member

Committee on Finance 

United States Senate 

The Honorable William M. Thomas

Chairman

The Honorable Charles B. Rangel

Ranking Minority Member

Committee on Ways and Means

House of Representatives

The Honorable Joe L. Barton

Chairman 

The Honorable John D. Dingell 

Ranking Minority Member

Committee on Energy and Commerce 

House of Representatives
Page 15 GAO-05-72 Medicare Payment for Inhalation Therapy

Appendix I

Scope and Methodology ApApenednxidexiIs

In conducting this study, we analyzed data from 12 inhalation therapy 

suppliers. We interviewed officials from the Centers for Medicare & 

Medicaid Services (CMS), three durable medical equipment (DME) 

regional carriers, and the Department of Veterans Affairs (VA) to gather 

comparative information on how VA pays for inhalation therapy. We also 

interviewed representatives from the American Association for Respiratory 

Care; American Association for Homecare; American College of Chest 

Physicians; Emphysema Foundation for Our Right to Survive; and National 

Association for Medical Direction in Respiratory Care; and two 

manufacturers and a wholesaler of inhalation therapy drugs. These 

interviewees helped us identify 20 inhalation therapy suppliers that we 

interviewed. We conducted a site visit at an inhalation therapy pharmacy 

and DME supply branch location, and interviewed officials at these 

facilities. 

To obtain information on suppliers’ costs of purchasing and providing 

inhalation therapy drugs to Medicare beneficiaries, we asked the 

20 inhalation therapy suppliers we interviewed to report cost data to us on 

worksheets we provided. We analyzed 2003 cost information from 12 of 

these suppliers. We assessed the reliability of the cost data in several ways. 

For publicly traded companies, we compared certain submitted data, such 

as net revenue and income tax, to data reported in their annual reports filed 

with the Securities and Exchange Commission. In addition, we calculated 

the average percentage of total drug acquisition and dispensing costs 

accounted for by certain cost factors and compared our findings to a 

similar 2003 industry study. We also compared each supplier’s reported 

data to statements they made during our interviews. We collected data on 

personnel costs by service (pharmacy) on one worksheet, and by type of 

personnel (pharmacist) on another. For each supplier, we compared total 

reported personnel costs on each of these worksheets. Using 2003 

Medicare DME claims, we calculated each supplier’s total Medicare 

inhalation therapy revenue and compared it to the total they reported on 

the worksheets. Although we initially received data from 13 suppliers, we 

excluded the data of one small, retail pharmacy supplier, as we considered 

its data unreliable. This pharmacy did not complete one of the personnel 

worksheets, and, therefore, we could not compare and verify its reported 

personnel costs. This pharmacy also reported drug acquisition costs that 

were inconsistent with other suppliers’ acquisition costs, in some cases 

over 25 times higher. We determined that the data from the remaining 

suppliers were reliable for our purposes. 
Appendix I

Scope and Methodology

Page 16 GAO-05-72 Medicare Payment for Inhalation Therapy

Our sample of 12 suppliers represents national, regional, and local 

homecare and mail-order pharmacies. All suppliers have other service 

lines in addition to inhalation therapy, such as the provision of DME, 

infusion drugs, and oxygen. These 12 suppliers accounted for more than 42 

percent of 2003 Medicare inhalation therapy payments. Although these 

suppliers represent companies with a wide range of service volumes and 

geographic locations, they are not a statistically representative sample of 

all inhalation therapy suppliers. 

In our analysis, we excluded certain costs. We excluded sales and 

marketing costs, as they are not allowed by Medicare, as well as “other” 

costs that a supplier did not specifically describe. We excluded suppliers’ 

costs for patient education on the use of the nebulizer because they are 

covered under Medicare’s payment for the equipment. 

To analyze suppliers’ costs of purchasing inhalation therapy drugs, we 

divided total 2003 acquisition costs (net of rebates and discounts) for each 

drug by the total number of billing units to obtain a per unit acquisition cost 

for each drug for each supplier. We analyzed costs for the 4 largest 

suppliers, each of which had payments accounting for at least 3 percent of 

all Medicare inhalation therapy payments in 2003, and all other, or small, 

suppliers. To identify costs associated with dispensing and delivering 

inhalation therapy drugs, we analyzed 2003 costs associated with 

dispensing and delivering these drugs for each of the 12 suppliers. We 

determined the portion of inhalation therapy costs related to drugs using 

the percent of inhalation therapy revenue accounted for by inhalation 

therapy drug revenue. For pharmacy and medication refill and compliance 

phone calls, we used 100 percent of inhalation therapy costs, as these costs 

are related only to providing the drugs. For each supplier, we divided 

inhalation therapy drug dispensing costs by the number of reported 

inhalation therapy patient-months to determine per patient monthly drug 

dispensing costs. We also determined per patient drug dispensing costs 

with 90-day delivery by including only once the costs that would be 

incurred one time per dispensing and by tripling all other costs. We 

included pharmacy, packaging and shipping, delivery, medication refill and 

compliance phone calls, other patient care costs, and billing and collection 

costs only once in this analysis. 

We calculated the difference between the 2003 Medicare payment rates and 

the lowest and highest acquisition costs for albuterol sulfate and 

ipratropium bromide reported by our suppliers by multiplying both the 

payment rates and acquisition costs by the number of milligrams in the 
Appendix I

Scope and Methodology

Page 17 GAO-05-72 Medicare Payment for Inhalation Therapy

typical monthly supply of albuterol sulfate or ipratropium bromide and 

subtracting the cost from the payment.

We conducted our work from May through October 2004 in accordance 

with generally accepted government auditing standards.
Page 18 GAO-05-72 Medicare Payment for Inhalation Therapy

Appendix II

Comments From the Centers for Medicare & 

Medicaid Services ApendxiI
Appendix II

Comments From the Centers for Medicare & 

Medicaid Services

Page 19 GAO-05-72 Medicare Payment for Inhalation Therapy
Appendix II

Comments From the Centers for Medicare & 

Medicaid Services

(290374) Page 20 GAO-05-72 Medicare Payment for Inhalation Therapy
GAO’s Mission The Government Accountability Office, the audit, evaluation and 

investigative arm of Congress, exists to support Congress in meeting its 

constitutional responsibilities and to help improve the performance and 

accountability of the federal government for the American people. GAO 

examines the use of public funds; evaluates federal programs and policies; 

and provides analyses, recommendations, and other assistance to help 

Congress make informed oversight, policy, and funding decisions. GAO’s 

commitment to good government is reflected in its core values of 

accountability, integrity, and reliability.

Obtaining Copies of 

GAO Reports and 

Testimony

The fastest and easiest way to obtain copies of GAO documents at no cost 

is through GAO’s Web site (www.gao.gov). Each weekday, GAO posts 

newly released reports, testimony, and correspondence on its Web site. To 

have GAO e-mail you a list of newly posted products every afternoon, go to 

www.gao.gov and select “Subscribe to Updates.”

Order by Mail or Phone The first copy of each printed report is free. Additional copies are $2 each. 

A check or money order should be made out to the Superintendent of 

Documents. GAO also accepts VISA and Mastercard. Orders for 100 or 

more copies mailed to a single address are discounted 25 percent. Orders 

should be sent to:

U.S. Government Accountability Office

441 G Street NW, Room LM

Washington, D.C. 20548

To order by Phone: Voice: (202) 512-6000 

TDD: (202) 512-2537 

Fax: (202) 512-6061

To Report Fraud, 

Waste, and Abuse in 

Federal Programs

Contact:

Web site: www.gao.gov/fraudnet/fraudnet.htm

E-mail: fraudnet@gao.gov

Automated answering system: (800) 424-5454 or (202) 512-7470

Congressional 

Relations

Gloria Jarmon, Managing Director, JarmonG@gao.gov (202) 512-4400

U.S. Government Accountability Office, 441 G Street NW, Room 7125 

Washington, D.C. 20548

Public Affairs Jeff Nelligan, Managing Director, NelliganJ@gao.gov (202) 512-4800

U.S. Government Accountability Office, 441 G Street NW, Room 7149 

Washington, D.C. 20548
United States

Government Accountability Office

Washington, D.C. 20548-0001

Official Business

Penalty for Private Use $300

Address Service Requested

Presorted Standard

Postage & Fees Paid

GAO

Permit No. GI00