June Gibbs Brown

Inspector General

Medicare Licensing Requirements for Prescription Drug Suppliers, OEI-07-98-00460

Nancy-Ann Min DeParle 

Administrator

Health Care Financing Administration

We reviewed the Health Care Financing Administration (HCFA) and National Supplier

Clearinghouse (NSC) efforts to ensure that durable medical equipment suppliers have valid

pharmacy licenses to bill Medicare for prescription drugs. We are outlining the details of

our review for your information and necessary action.

BACKGROUND 

Effective December 1, 1996, HCFA required that only entities licensed to dispense 

prescription drugs may bill Medicare for them. As such, only durable medical equipment 

(DME) supply companies licensed to dispense prescription drugs may bill for these items 

when provided in conjunction with DME or prosthetic devices. 

The NSC is responsible for issuing Medicare supplier billing numbers and ensuring that 

suppliers meet prescribed standards for participation. Durable medical equipment regional 

carriers (DMERCs) process all claims submitted by these suppliers for payment of 

prescription drugs used with DME, and recovery of any incorrect payments. A third 

component, the statistical analysis durable medical equipment regional carrier 

(SADMERC), performs analysis of claims submitted by suppliers and prepares reports. 

FINDINGS 

The National Supplier Clearinghouse Has Taken Actions to Determine That DME 

Suppliers Billing for Drugs Have Valid Pharmacy Licenses 

The NSC has taken several steps to determine the pharmacy licensure status of DME 

companies with a Medicare supplier number. It conducted an initial probe sample which 

found that a problem existed. It then expanded the review to all DME suppliers that bill 

prescription drugs. Of the total number of DME suppliers, it identified approximately 

35,000 which had been approved to bill or had actually billed Medicare for drugs. The NSC 

chose not to review the approximately 25,000 suppliers in chain organizations because, 

based on previous studies and reviews, it did not consider them a compliance risk. The 
Page 2 - Nancy-Ann Min DeParle

NSC focused on the remaining 10,020 suppliers which did not have current pharmacy

licenses on file.

Over the course of the next 8 months, NSC sent two letters and made telephone calls to

suppliers requesting licenses. It also reviewed supplier requests for recertifications which

are conducted every 3 years. As of October 1998, it had received 8,195 responses from the

outstanding suppliers. It found that these respondents either had or did not have a current

license; many licenses were inactive or expired; or the durable medical equipment company 

was no longer in business. The NSC shared this information with the DMERCs to

appropriately update the suppliers’ files. This left 1,825 suppliers that had not responded to

NSC’s requests.

Few Non-Licensed Suppliers Continue to Bill Medicare for Drugs 

We provided the list of 1,825 suppliers to the SADMERC to match against Medicare billing 

and payment records. Its latest data showed that 822 non-respondents had billed drugs to 

Medicare with allowed charges of over $13.7 million for 1997. The DMERCs are 

reviewing this information to take recoupment action on claims that were incorrectly paid if 

the supplier did not have a current pharmacy license. 

As the DMERCs implemented an automated claims processing system, as of July 1, 1998, 

which was to facilitate identifying providers that did not meet all requirements to bill 

prescription drugs, we requested that the SADMERC furnish payment data on all nonrespondent suppliers which billed Medicare in the last quarter of 1998. Its data showed that 

221 of the 1,825 suppliers had billed Medicare and had allowed charges of almost $1.5 

million. 

The majority of these suppliers had minimal payments. We, therefore, focused on the 59 

which had allowed charges of $1,000 or more. We made telephone calls to the various 

State Boards of Pharmacy and found that 50 of these suppliers had current licenses and nine 

were not licensed. Medicare paid $150,298 to these 9 suppliers. 

CONCLUSION 

The HCFA and NSC appear to be taking appropriate action to ensure that suppliers billing

for prescription drugs have valid pharmacy licenses. Assuming HCFA continues to pursue

recoupment, we do not intend to continue work on this topic. We are issuing this report for

informational purposes and to encourage corroborative efforts to recover incorrect

payments and identify any remaining suppliers without required licensure. We will provide

the DMERCs with the list of suppliers we have identified which continue to bill for

prescription drugs but do not have a valid pharmacy license. 

I appreciate the assistance provided to my staff in conducting this inspection. If you have

any questions or comments about this report, please call me or George Grob, Deputy

Inspector General for Evaluation and Inspections, or have your staff contact 

Mary Beth Clarke at (202) 619-2481.