DepartmelTitof Health and Human Services 

OFFICE OF 

INSPECTOR GENERAL 

EXCESSIVE MEDICARE PAYMENTS 

FOR PRESCRIPTION DRUGS 

JUNE GIBBS BROWN 

Inspector General 

DECEMBER 1997 

OEI-03~97-00290 
OFFICE OF INSPECI’OR 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 Evaluationand 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 HEADQUARTERS 

Linda M. Ragone, Project Leader Lisa A. Foley, Program Specialist 

David Tawes 

Nancy J. Molyneaux 

Lauren McNulty 

Amy Sernyak 

Cynthia R. Hansford 

Brijen Shaw 

To obtain copies of thisreport, please call the PhiladelphiaRegional Office at (800) 531-9562. 
EXECUTIVE SUMMARY 

PURPOSE 

To compare Medicare allowances for prescription drugs with drug acquisition prices 

currently available to the physician and supplier communities. 

BACKGROUND 

Medicare allowances for prescription drugs increased 25 percent from $1.8 billion in 

1995 to $2.3 billion in 1996. However, the number of services allowed increased only 

9 percent between the 2 years. 

Medicare does not pay for over-the-counter or many prescription drugs that are selfadministered. However, the program does pay for certain categories of drugs used by 

Medicare beneficiaries. 

On January 1, 1998, Medicare Part B will begin to reimburse covered drugs at 95 

percent of the average wholesale price. Currently, Medicare carriers may determine 

the amounts that Medicare will pay for these drugs based on either the lower of the 

Estimated Acquisition Cost (EAC) or the national Average Wholesale Price (AWP). 

The EAC is determined based on surveys of the actual invoice prices paid for the 

drug. The AWP is reported in The Red Book and other pricing publications and 

databases used by the pharmaceutical industry. Historically, it has been the AWP that 

carriers have used to develop Medicare reimbursement for prescription drugs. 

To determine if average wholesale prices paid by Medicare truly represent wholesale 

prices available to physicians and prescription drug suppliers, we focused on 22 drug 

codes representing the largest dollar outlays to the program in 1995. We then 

compared the Medicare allowances for these drug codes with prices available to the 

physician and supplier communities. 

FINDINGS 

Medicare allowances for 22 drugs exceeded actual wholesale prices by $447 million in 

1996. 

Medicare and its beneficiaries payments for the 22 drugs would have been reduced by 

an estimated 29 percent ($447 million of $1.5 billion) if actual wholesale prices rather 

than AWP’s were the basis for Medicare reimbursement. Similar savings of $445 

million were also identified for 1995. If the savings percentage for just the 22 drugs 

was applied to Medicare’s allowances for all drugs, the program and its beneficiaries 

would have saved an estimated $667 million in 1996. 
For more than one-third of the 22 drags review& Medicare allowed amoan& were more 

than double the actual wholesale prices avaikkble to physicks and suppliem. 

Medicare allowed between 2 and 10 times the actual average wholesale prices offered 

by drug wholesalers and group purchasing organizations for 8 of the 22 drugs 

reviewed. Medicare allowed at least 20 percent more than the actual average 

wholesale price for over 80 percent of the 22 drugs. For every one of the 22 drugs 

reviewed, Medicare allowed amounts were more than the actual average wholesale 

price in both 1995 and 1996. Not only did Medicare pay more than the actual average 

wholesale price, the program allowed more than the highest average wholesale price 

for every drug. 

There is no consistency among carriers in establishing and updating Medicare drug 

reimbursement amounts. 

Although Medicare’s reimbursement methodology for prescription drugs does not 

provide for different payment rates based on geographical factors, the allowed 

amounts for individual drug codes varied among the carriers. Medicare guidelines 

allow carriers to update prescription drug reimbursement on a quarterly basis. 

However, not only did some carriers update yearly rather than quarterly but carrier 

allowed amounts for the same drug code differed within a single quarter. 

RECOMMENDATIONS 

The findings of this report provide evidence that Medicare and its beneficiaries are 

making excessive payments for prescription drugs. The published AWPs that are 

currently being used by Medicare-contracted carriers to determine reimbursement 

bear little or no resemblance to actual wholesale prices that are available to the 

physician and supplier communities that bill for these drugs. 

We believe the information in this report provides further support for a previous 

recommendation made by the Office of Inspector General. We recommendedthat 

HCFA reexamine its Medicare drug reimbursementmethodologies,with the goal of 

reducingpaymentsas appropriate. Beginning in January 1998, Medicare 

reimbursement for prescription drugs will be 95 percent of average wholesale price. 

We believe that the 5 percent reduction is not a large enough decrease and that 

further options to reduce reimbursement should be considered. 

We also believe that the variance of Medicare reimbursement for individual drug 

codes among carriers is inappropriate. The rate at which physicians and suppliers are 

paid for drugs should not depend on which carrier the providers bill. We, therefore, 

recommendthat HCFA require all carriersto reimbursea uniformallowed amount 

for each HCFA Common Procedural Coding System(HCPCS) drug code. The HCFA 

could choose to supply all carriers with a list of average wholesale prices that it has 

determined represent each drug code. The carriers could then use the uniform prices 

to calculate payment. The HCFA could also designate one single entity to perform all 

ii 
necessary calculations to determine reimbursement for each drug code on a quarterly 

basis. All carriers would then use this standard reimbursement amount. 

AGENCY COMMENTS 

The HCFA concurred with our recommendations. The HCFA’s proposal in the 

President’s 1998 budget that would have required physicians to bill Medicare the 

actual acquisition cost for drugs was not adopted by Congress. However, the agency 

states that it will continue to pursue this policy in other appropriate ways. 

We support HCFA’s continued pursuance of reducing drug payments where 

appropriate. We do not believe that the reimbursement methodology for prescription 

drugs recently adopted by Congress will curtail the excessive drug payments we’ve 

identified in the Medicare program. In this report we’ve identified Medicare 

allowances that were 11 to 900 percent greater than drug prices available to the 

physician and supplier communities. 

To address the issue of uniformity among carriers, HCFA has convened a Workgroup 

to develop an electronic file consisting of the average wholesale prices for drugs 

covered by Medicare. The agency reports it will distribute this file to Medicare 

contractors for their use in paying drug claims. 

... 

111 
TABLEOFCONTENTS 

PAGE 

EXEXWIWESUMMARY .......................................... i 

INTRODUCI-ION ................................................. 1 

FINDINGS ...................................................... 7 

� Estimated savings based on actual wholesale drug prices .................. 7 

� Medicare allowed amounts more than double the average actual price ....... 8 

� Lack of consistency in reimbursement rates for drug codes ................ 9 

RECOMMENDATIONS ........................................... 10 

APPENDICES 

A: Description of 22 HCPCS Codes ................................. A-l 

B: Summary of Wholesale Prices and Estimated Savings for 1995 and 1996 .... B-l 

C: Individual Drug Allowances and Savings Percentages for 1995 and 1996 .... C-l 

D: Health Care Financing Administration Comments ..................... D-l 
INTRODUCTION 

PURPOSE 

To compare Medicare allowances for prescription drugs with drug acquisition prices 

currently available to the physician and supplier communities. 

BACKGROUND 

Medicare allowances for prescription drugs increased 25 percent from $1.8 billion in 

1995 to $2.3 billion in 1996. However, the number of services allowed increased only 

9 percent between the two years. 

Medicare Coverage and Payment for Presctiptim Drugs 

While Medicare does not pay for over-the-counter or many prescription drugs that are 

self-administered, it does pay for certain categories of drugs used by Medicare 

beneficiaries. Under certain circumstances, Medicare Part B covers drugs that are 

used with durable medical equipment or infusion equipment. Medicare will cover 

certain drugs used in association with dialysis or organ transplantation. Drugs used for 

chemotherapy and pain management in cancer treatments are also covered. The 

program also covers certain types of vaccines such as those for flu and hepatitis B. 

Depending on the type of drug, both local carriers and four Durable Medical 

Equipment Regional Carriers (DMERCs) are responsible for processing claims for 

drugs covered under Part B of the Medicare program. The carriers are responsible 

for determining the allowance that Medicare will pay for these drugs. 

Carriers base their current allowance rates on the regulations established in 42 Code 

of Federal Regulation 405.517. According to the regulations, Medicare computes an 

allowed amount for drugs based on either the lower of the Estimated Acquisition Cost 

(EAC) or the national Average Wholesale Price (AWP). The allowed amount is the 

price that Medicare and its beneficiaries pay a drug supplier. The EAC is determined 

based on surveys of the actual invoice prices paid for the drug. The AWP is 

determined through fie Red Book or similar pricing publications and databases used 

by the pharmaceutical industry. The AWPs are mainly provided to these sources by 

pharmaceutical manufacturers. If a drug has multiple sources (more than one brand 

or generic version), the price is based on the lower of the EAC or the median of the 

national AWP for all generic sources. Historically, carriers have utilized AWP and not 

estimated acquisition cost to develop Medicare reimbursement for prescription drugs. 

Drugs are billed to the Medicare program based on codes developed by the Health 

Care Financing Administration (HCFA). These codes are developed as part of the 

HCFA Common Procedure Coding System (HCPCS). The codes define the type of 

drug and, in most cases, a dosage amount. The codes do not indicate whether a brand 

1 
or generic version of the drug was administered; nor do the codes provide information 

on the manufacturer or distributor of the drug provided. 

Change in Medicare Reimbmernent for Prescrption Drugs 

In recent legislation, Congress established reimbursement for prescription drugs at 95 

percent of a drug’s average wholesale price. This change will be implemented on 

January 1, 1998. 

A different proposal to change the Medicare reimbursement methodology for 

prescription drugs was included in the President’s FY 1998 budget. The proposal 

provided for the amendment of 42 U.S.C. 1395u(o) to set payment for drugs not 

otherwise paid on a cost or prospective payment basis. The revision set payment at 

the lowest of: actual acquisition cost to the provider, AWP, median actual acquisition 

cost, or an amount otherwise determined under the Code. The actual acquisition cost 

was defined to include all discounts, rebates, or any other benefit in cash or in kind. 

This proposal was supported by HCFA but was not the version eventually adopted by 

Congress. 

Related Work by the cyg?ce of Inspector General 

This report is one of several Office of Inspector General reports concerning Medicare 

payments for prescription drugs. In 1996, we released a report entitled 

Appropriateness of Medicare Prescription Drug Allowances (OEI-03-96-00420) which 

compared Medicare drug reimbursement mechanisms with Medicaid payment 

mechanisms for 17 drugs and found that Medicare could achieve significant savings by 

adopting reimbursement strategies similar to those used by Medicaid. The OIG has 

also produced several reports focusing on inhalation drugs paid for by Medicare. In 

Medicare Payments for Nebulizer Drugs (OEI-03-94-00390), we found that Medicaid 

reimbursed albuterol sulfate and other nebulizer drugs at significantly lower prices 

than Medicare. In a companion report called A Comparison of Albuterol Sulfate Prices 

(OEI-03-94-00392), we found that many retail and mail-order pharmacies charge 

customers less for generic albuterol sulfate than Medicare’s allowed price. Suppliers’ 

Acquisition Costs for Albuterol Sulfate (OEI-03-94-00393) found that Medicare’s 

allowances for albuterol sulfate substantially exceeded suppliers’ acquisition costs. 

The Office of Inspector General also recently issued a report on acquisition costs of 

brand name drugs by Medicaid pharmacies. In Medicaid Pharmacy - Actual 

Acquisition Costs of Presctiption Drug Products for Brand Name Drugs (A-06-96-00030), 

the Office of Audit Services estimated that the actual acquisition cost for brand name 

drugs was 18 percent below AWP. 

METHODOLOGY 

To determine if average wholesale prices paid by Medicare truly represent wholesale 

prices available to physicians and prescription drug suppliers, we focused on drug 

2 
codes representing the largest dollar outlays to the program in 1995. We then 

compared the Medicare allowances for these drug codes with prices available to the 

physician and supplier communities. 

We collected from three sources the data needed to compare Medicare allowed 

amounts to actual wholesale prices. For information on Medicare allowances for 

prescription drugs, we compiled statistics from HCFA’s National Claims History 

(NCH) File. We then collected Medicare reimbursement rates for specific drugs from 

contracted carriers. Lastly, we analyzed wholesale prices from drug wholesalers and 

group purchasing organizations. 

Medicare Allowance Data for prescription Drugs 

We decided to review the 30 drug codes with the highest Medicare allowances for 

1995. We chose 1995 since the Medicare claims data was 98 percent complete at the 

commencement of the inspection. To determine the Medicare allowances for 

prescription drugs in 1995, we compiled a list of HCPCS codes that represent all of 

the drugs which Medicare reimburses. The drug code list primarily contained HCPCS 

codes beginning with a J (known as J codes) which represent mainly injectable drugs 

or drugs used in conjunction with durable medical equipment. Also included in our 

list of drugs were K codes which usually represent immunosuppressive drugs, Q codes 

which represent mainly drugs used for End Stage Renal Disease, several A codes that 

represent drugs used for diagnostic imaging, and immunization or vaccine codes that 

are represented by a five digit numeric code. 

We then retrieved NCH allowance and utilization data using HCFA’s Part B Extract 

and Summary System (BESS). We aggregated the allowances for each code to 

calculate Medicare’s total prescription drug allowance for 1995. We then determined 

the 30 drug codes with the highest individual allowances for that year. 

Using NCH data, we calculated the Medicare allowances for all drugs in 1996. We 

also determined the 1996 allowances for the 30 drug codes with the highest allowances 

in 1995. At the time of our inspection, the NCH data for 1996 was 95 percent 

complete. 

Carrier Allowances for Prescription Drugs 

We sent requests for carrier drug reimbursement rates to Medicare’s 26 fraud 

information specialists. The fraud information specialists coordinate work among all 

HCFA contractors in the regions they represent. There are a total of 61 geographical 

regions that local carriers cover. We received drug allowances from 50 of the 61 

areas. We also received responses from two of the four DMERCS. 

We requested allowed amounts for prescription drug codes with the highest total 

allowances in 1995. The allowed amount reflects the dollar reimbursement that 

Medicare will allow for the specific dosage defined by the HCPCS drug code. We 

3 
asked the carriers to provide allowed amounts by quarter for calendar years 1995, 

1996, and 1997. However, some carriers provided us with data on a yearly basis and 

others only for certain quarters. 

Some carriers also furnished allowed amounts for both participating and nonparticipating physicians. Physicians participating in the Medicare program agree to 

accept Medicare allowed amounts as total reimbursement for their services. 

Participating physicians receive 5 percent more in Medicare reimbursement for 

services. In the instances where both participating and non-participating allowed 

amounts were provided, we used the participating physician allowed amounts. More 

than three-quarters of physicians across the nation now participate in the Medicare 

program. 

Utilizing the data provided by carriers, we calculated an average Medicare allowed 

amount for each drug code by year. These allowed amounts were used to compare 

Medicare reimbursement with drug acquisition costs for physicians and suppliers. 

Prescriplion Drug Costs for Physicians and Suppliers 

In order to determine acquisition costs for the top drugs, we reviewed 1995 and 1996 

prices offered by wholesale drug companies and group purchasing organizations 

(GPOs). We obtained pricing lists/catalogs for seven wholesale drug companies and 

seven group purchasing organizations. Group purchasing organizations provide 

members with lower cost products by negotiating prices for specific drugs from 

manufacturers. The member can then purchase drugs at the negotiated price either 

directly from the manufacturer or a drug wholesaler that agrees to accept the 

negotiated price. For the GPOs we reviewed, most of the major drug wholesalers 

accept the GPO contracted price. 

The 14 pricing sources we used provided pharmaceutical products mainly to physician 

practices and specialized or closed pharmacies. Depending on individual State 

licensing practices, specialized or closed pharmacies normally do not provide retail 

prescription drug dispensing to walk-in customers. Instead, they often provide 

prescription drugs for home infusion or inhalation therapy. 

After beginning our review of wholesale drug costs, we determined that 2 of the top 

30 drugs codes we identified for 1995 could not be used for the inspection. Code 

57699 represents not-otherwise-classified inhalation drugs and Code 57190 for Factor 

VIII (human anti-hemophilic factor) has a dosage requirement that is difficult to 

determine. Therefore, obtaining wholesale prices for these two codes would not be 

possible. 

For the remaining 28 drug codes identified for our analysis, 17 were used for the 

treatment of cancer/leukemia, 5 were inhalation drugs, 2 were vaccines, and 2 were 

used for organ transplantation or valve replacement complications. There was also a 

drug used for immunodeficiencies and another for severe infections. The majority of 

4 
these drugs would most likely be purchased and administered by physicians or other 

health care practitioners. The inhalation drugs or drugs used for home infusion would 

most likely be provided by a specialized pharmacy or supplier. 

For the 28 drug codes, we collected 1995 and 1996 prices from the 14 drug pricing 

lists/catalogs. We decided not to present prices for drugs where fewer than two 

different pricing sources could be identified per year. There were 6 codes that did not 

meet the two source minimum. These codes were: vaccine codes 90724 and 90732, 

inhalation codes 57645 and 57660, and codes K0121 and 51245 used for 

transplants/valve replacements. A list of the HCPCS codes’ descriptions and dosages 

for the final 22 drugs used for our evaluation is provided in Appendix A. 

The 22 drug codes represented 10 single-source, 9 multiple-source, and 3 multiplebrand drugs. A single-source drug has only one brand of drug available. A multiplesource drug has both brand and generic forms of the drug available. There were no 

drug products manufactured in the dosage defined by the HCPCS code for five drugs 

(57620, Q0136, 52405, 59181, 59293). We selected all the drugs with higher dosages 

that met the drug description and applied a conversion factor to achieve prices for the 

HCPCS-specified dosage. For an additional code (J1561), we found that out of the 

multitude of prices we could find for the drug only three met the exact dosage 

requirement. Since the higher dosage products seemed to be the more prevalent way 

of purchasing this drug, we included them in our analysis. 

We searched the 14 price lists for both brand and generic prices during 1995 and 

1996. For nine drug codes, we obtained between 5 and 8 separate prices. Eight of 

the nine were single-source drugs. For another eight codes, we found between 12 and 

29 separate prices. We found between 30 and 70 separate prices for the remaining 

five drug codes. 

Calculation of Potential Medicare Savings for prescription Dogs 

To determine the potential savings to Medicare if acquisition costs rather than 

published AWPs were used for reimbursement, we compared Medicare’s allowed 

amounts to the wholesale prices we collected. To do this, we compiled all the pricing 

information from the sources reviewed and calculated an average price by year for all 

22 codes. We believe that the pricing information supplied by the drug wholesalers 

and group purchasing organizations provides factual evidence of acquisition costs 

available to physicians and suppliers. 

The average price or average acquisition cost for each drug code was then compared 

to the average Medicare allowed amount that we calculated from the carrier data. 

For each drug code, the difference between the average price and the Medicare 

allowed amount was computed. We then applied this amount to the number of 

services paid by Medicare for each drug in 1995 and 1996. The resulting dollar 

amounts were aggregated to determine the total estimated savings to Medicare if 

acquisition costs rather than AWP had been used to determine reimbursement. 

5 
Appendix B provides the average Medicare allowed amounts and actual average 

wholesale prices computed for the 22 drug codes reviewed. Although we utilized the 

actual average wholesale price to report savings in the findings section of this report, 

the appendices also contains the potential savings to Medicare if the lowest and 

highest wholesale prices found were compared to the Medicare allowed amount. 

6 
FINDINGS 

MEDICARE ALLOWANCES FOR 22 DRUGS EXCEEDED ACTUAL 

WHOLESALE PRICES BY $447MILLION IN 1996. 

Medicare carriers now base prescription drug reimbursement on published average 

wholesales price of drugs. However, physicians and suppliers are often able to 

purchase drugs for prices that are much lower than the official AWPs provided by 

manufacturers. 

After reviewing wholesale drug catalogs and group purchasing organizations’ prices for 

the 22 drugs, we estimated that $447 million would have been saved by Medicare and 

its beneficiaries if Medicare had based reimbursement on actual wholesale prices 

rather than published AWPs in 1996. These wholesale prices are available to 

physicians, specialized pharmacies, and other suppliers. These wholesale prices 

represent the actual acquisition costs to physicians and suppliers that bill Medicare for 

these drugs. 

Total allowed charges for the 22 drugs would have been reduced by 29 percent 

($447 million of $1.5 billion) if actual wholesale prices rather than AWP were the 

basis for Medicare reimbursement. The 22 drugs represented 67 percent of the $2.3 

billion in total Medicare drug allowances for 1996. If the savings percentage for just 

the 22 drugs was applied to Medicare’s reimbursement for all drugs, the program and 

its beneficiaries would have saved an estimated $667 million in 1996. 

The savings for individual drugs ranged from 13 percent of allowances for three drugs 

(59202, Q0136, 59185) to a high of 92 percent for leucovorin calcium (50640). Almost 

half of the drugs (10 of 22) had estimated savings greater than 40 percent of 

allowances. A table provided in Appendix C lists the 1996 allowances and estimated 

savings for the 22 drugs. The table also lists the percentage of allowance saved for 

each individual drug if reimbursement had been based on the actual average wholesale 

prices available for the drug. 

Simiihr savings of $445 million were idenw for 1995. 

If Medicare had based reimbursement on actual wholesale costs in 1995, the program 

and its beneficiaries would have saved an estimated 35 percent in payments for the 22 

drugs. This would have amounted to savings of $445 million on $1.3 billion in total 

1995 program expenditures for these drugs. The $1.3 billion in expenditures for the 

22 drugs represented 70 percent of the $1.8 billion in Medicare total drug allowances 

for 1995. 

The percentage of allowance saved for individual drugs ranged from 15 percent for 

carboplatin (J9405) and fludarabine phosphate (59185) to 95 percent for leucovorin 

calcium (50640). Half of the drugs (11 of 22) had estimated savings greater than 40 

7 
percent of their 1995 allowances. Individual drug allowances and savings for 1995 are 

presented in Appendix C. 

FOR MORE THAN ONE-THIRD OF THE 22 DRUGS REVIEWED, MEDICARE 

ALLOWED AMOUNTS WERE MORE THAN DOUBLE THE ACTUAL 

AVERAGE WHOLESALE PRICE AVAILABLE TO PHYSICIANS AND 

SUPPLIERS. 

Medicare allowed between 2 and 10 times the actual average wholesale prices offered 

by drug wholesalers and group purchasing organizations for 8 of the 22 drugs 

reviewed. For one drug, Medicare allowed 900 percent more than the average price 

available for the drug in 1995 and 673 percent more in 1996. The chart below 

provides the percentage of the Medicare allowed amount that is greater than the 

actual average wholesale price for each of the eight drugs. 

n4EiDIcARE~~MoRRTHANDOUB~ 

THE WHOLESALE PRICE POR EitGHT DRUGS 

1000 

9oc800-

J3370 NO10 J7672 J9000 J7670 J1561 JO640 J7620 

DRUG CODBS 

Medicare allowances were also significantly higher than acquisition costs for the 

remaining 14 drugs reviewed. Medicare allowed 60 to 95 percent more than the 

actual average wholesale price for 3 drugs in 1995 and 2 drugs in 1996. Medicare 

allowed amounts were higher by 20 to 50 percent for 9 drugs in 1995 and 8 drugs in 

1996. Reimbursement was between 11 and 18 percent more for the remaining 2 drugs 

in 1995 and 4 drugs in 1996. 

8 
Medicare and its beneficiaries paid at least 20 percent more than the actual average 

wholesale price for over 80 percent of the 22 drugs. For every one of the 22 drugs 

reviewed, Medicare allowed more than the average actual price in both 1995 and 

1996. Not only did Medicare pay more than the average price, the program allowed 

more than even the highest wholesale price obtained for every drug. Appendix B 

provides information on the highest and lowest wholesale price available for each drug 

in 1995 and 1996. 

Based on the differences found between Medicare allowed amounts and actual 

wholesale prices, it is apparent that the current Medicare reimbursement methodology 

is based on an significantly inflated AWP statistic which bears little resemblance to 

actual wholesale prices available in the marketplace. 

THERE IS NO CONSISTENCY AMONG CARRIERS IN ESTABLISHING AND 

UPDATING MEDICARE DRUG REIMBURSEMENT AMOUNTS. 

Although Medicare’s reimbursement methodology for prescription drugs does not 

provide for different payment rates based on geographical factors, the allowed 

amounts for individual drug codes varied among the carriers. Medicare guidelines 

allow carriers to update prescription drug reimbursement on a quarterly basis. 

However, not only did some carriers update yearly rather than quarterly but carrier 

allowed amounts for the same drug code differed within a single quarter. 

For some drug codes, the differences in allowed amounts were significant. Carriers’ 

allowed amounts varied even for single-source drugs where the reimbursement rate is 

based on only one AWP. A carrier reimbursed code 59217 (leuprolide acetate, a 

single-source drug) at $496.25 for all of 1995. Another carrier allowed $412.29 for the 

first quarter of 1995, $439.30 for the second and third quarters, and $477.50 for the 

fourth. For the first quarter of 1995, providers in one State were receiving 20 percent 

more in reimbursement than providers billing the same drug code in another State. 

The second carrier eventually paid $496.26 for this code in the first quarter of 1996. 

However, the first carrier increased reimbursement to $515.63 in the same quarter. 

Little uniformity was found among carriers when comparing changes in reimbursement 

from the first quarter of 1995 to the second quarter of 1997. One carrier’s 

reimbursement for code 59000 (doxorubicin hcl, 10 mg.) increased 128 percent from 

$20 to $45.50. Another carrier’s rate for the same code decreased 19 percent from 

$48.20 to $39.10. 

Since Medicare does not allow geographical differences to effect drug reimbursement, 

variations would seem to be caused by carriers’ decisions regarding when to update 

reimbursement, what sources to use for documenting AWPs, and in the case of 

multiple-source drugs which generic drugs to include in calculating the median statistic. 

9 
RECOMMENDATIONS 

The findings of this report provide evidence that Medicare and its beneficiaries are 

making excessive payments for prescription drugs. The published AWPs that are 

currently being used by Medicare-contracted carriers to determine reimbursement 

bear little or no resemblance to actual wholesale prices that are available to the 

physicians and suppliers that bill for these drugs. By basing reimbursement on 

published AWPs rather than more appropriate acquisition or wholesale prices, we 

estimate that Medicare and its beneficiaries paid nearly one billion dollars more for 

drugs in 1995 and 1996. 

We believe the information in this report provides further support for a previous 

recommendation made by the Office of Inspector General. We recommendedthat 

HCFA reexamine its Medicare drug reimbursementmethodologies,with the goal of 

reducingpaymentsas appropriate. The HCFA concurred with the recommendation. 

We urge readers to review our prior report, Medicare Payments for Nebulizer Drugs, 

which provided the full text of HCFA’s comments on our recommendation. 

For our readers’ convenience, the options for changing Medicare’s reimbursement 

methodology that appeared in the recommendation are presented below. We have 

modified the original discounted AWP and acquisition cost options in response to the 

evidence presented in this report concerning the large disparity between published 

AWPs and actual average wholesale prices available for prescription drugs. 

Options for Changing Medicare’s Reimbuwment Methodology for l%.wiption Drugs 

Discounted Wholesale Price 

Beginning in January 1998, Medicare will reimburse prescription drugs at 95 percent 

of AWP. Many State Medicaid agencies use greater discounted AWPs to establish 

drug prices. Medicare could also base its drug payments on this larger discounted 

average wholesale prices. We believe that the 5 percent discount that will soon be 

implemented is not a large enough decrease. Upon implementation of this option, 

some type of general limit should be applied to the prices to ensure that inappropriate 

increases in average wholesale prices that could occur in subsequent years do not 

adversely affect Medicare payments. In addition, the Secretary should be granted the 

authority to conduct sample surveys of actual wholesale prices to determine the 

amount of difference between actual average wholesale prices and published AWPs. 

The percentage difference found in the sample could then be applied to all AWPs 

used by the program to determine drug reimbursement. 

Acquisition Cost 

Medicare could base the payment of drugs on either actual or estimated acquisition 

costs. Although Medicare currently has the authority to use EAC, carriers have yet to 

10 

22 
successfully implement the option. Upon implementation of either the actual or 

estimated method, we believe that some type of general limit should be applied to 

ensure that inappropriate increases in drug prices do not occur in subsequent years. 

Manufacturers’ Rebates 

Medicare could develop a legislative proposal to establish a mandated manufacturers’ 

rebate program similar to Medicaid’s rebate program. We recognize that HCFA does 

not have the authority to simply establish a mandated manufacturers’ rebate program 

similar to the program used in Medicaid. Legislation was required to establish the 

Medicaid rebate program, and would also be required to establish a Medicare rebate 

program. We have not thoroughly assessed how a Medicare rebate program might 

operate, what administrative complexities it might pose, or how a Medicare rebate 

program might differ from a Medicaid rebate program. We believe, however, the 

legislative effort would be worthwhile. The same manufacturers that provide rebates 

to Medicaid make the drugs that are used by Medicare beneficiaries and paid for by 

the Medicare program. 

To implement this option, HCFA would have to revise Medicare’s claims coding 

system which does not identify the manufacturer or indicate if the drug is a brand 

name or a generic equivalent, information that is needed to discount the AWP and 

obtain a rebate for a specific drug. Medicaid uses National Drug Codes (NDC) in 

processing drug claims. The NDC identifies the manufacturer and reflects whether the 

drug is a brand name or a generic equivalent. 

Competitive Bidding 

Medicare could develop a legislative proposal to allow it to take advantage of its 

market position. While competitive bidding is not appropriate for every aspect of the 

Medicare program or in every geographic location, we believe that it can be effective 

in many instances, including the procurement of drugs. Medicare could ask 

pharmacies to compete for business to provide Medicare beneficiaries with 

prescription drugs. All types of pharmacies could compete for Medicare business, 

including independents, chains, and mail-order pharmacies. 

Inherent Reasonableness 

Since Medicare’s guidelines for calculating reasonable charges for drugs result in 

excessive allowances, the Secretary can use her “inherent reasonableness” authority to 

set special reasonable charge limits. If this option is selected, however, it will not be 

effective unless the Secretary’s authority to reduce inherently unreasonable payment 

levels is streamlined. The current inherent reasonableness process is resource 

intensive and time consuming, often taking two to four years to implement. Medicare 

faces substantial losses in potential savings--certainly in the millions of dollars--if 

reduced drug prices cannot be placed into effect quickly. 

11 
We also believe that the variance of Medicare reimbursement for individual drug 

codes among carriers is inappropriate. The rate at which physicians and suppliers are 

paid for drugs should not depend on which carrier providers bill. We, therefore, 

recommendthatHCFA require all carriersto reimbursea uniformallowed amount 

for each HCPCS drug code. The HCFA could choose to supply all carriers with a list 

of average wholesale prices that it has determined represent each drug code. The 

carriers could then use the uniform prices to calculate payment. The HCFA could 

also designate one single entity to perform all necessary calculations to determine 

reimbursement for each drug code on a quarterly basis. All carriers would then use 

this standard reimbursement amount. 

AGENCY COMMENTS 

The HCFA concurred with our recommendations. The HCFA’s proposal in the 

President’s 1998 budget that would have required physicians to bill Medicare the 

actual acquisition cost for drugs was not adopted by Congress. However, the agency 

states that it will continue to pursue this policy in other appropriate ways. The full 

text of HCFA’s comments are provided in Appendix D. 

We support HCFA’s continued pursuance of reducing drug payments where 

appropriate. We do not believe that the reimbursement methodology for prescription 

drugs recently adopted by Congress will curtail the excessive drug payments we’ve 

identified in the Medicare program. In this report we’ve identified Medicare 

allowances that were 11 to 900 percent greater than drug prices available to the 

physician and supplier communities. 

To address the issue of uniformity among carriers, HCFA has convened a Workgroup 

to develop an electronic file consisting of the average wholesale prices for drugs 

covered by Medicare. The agency reports it will distribute this file to Medicare 

contractors for their use in paying drug claims. 

12 
APPENDIX A 

Code 

59217 

57620 

59265 

59202 

JO640 

59045 

51440 

Q0136 

52405 

51625 

51561 

57670 

51441 

59182 

59000 

5903 1 

59181 

57672 

59293 

59185 

59010 

53370 

Descriptionof 22 HCPCS Codes 

Description 

Leuprolide Acetate (for depot suspension), 7.5 mg. 

Albuterol Sulfate, 0.083%, per ml., inhalation solution administered 

through DME 

Paclitaxel, 30 mg. 

Goserelin Acetate Implant, per 3.6 mg. 

Injection, Leucovorin Calcium, per 50 mg. 

Carboplatin, 50 mg. 

Injection, Filgrastim (G-CSF), per 300 mcg. 

Injection, Epoetin Alpha, (For Non-ESRD Use), per 1000 units 

Injection, Ondansetron Hydrochloride, per 1 mg. 

Injection, Granisetron Hydrochloride, per 1 mg. 

Injection, Immune Globulin, Intravenous, per 500 mg. 

Metaproterenol Sulfate, 0.4%, per 2.5 ml., inhalation solution 

administered through DME 

Injection, Filgrastim (G-CSF), per 480 mcg. 

Etoposide, 100 mg. 

Doxorubicin HCL, 10 mg. 

BCG (Intravesical) per instillation 

Etoposide, 10 mg. 

Metaproterenol Sulfate, 0.6%, per 2.5 ml., inhalation solution 

administered through DME 

Injection, Mitoxantrone Hydrochloride, per 5 mg. 

Fludarabine Phosphate, 50 mg. 

Doxorubicin HCL, 50 mg. (code discontinued 12/31/96) 

Injection, Vancomycin HCL, up to 500 mg. (code discontinued for 

infusion 9/l/96) 

A-l 
APPENDIX B 

SUMMARY OF WHOLESALE PRICES AND F2XlMATED SAVINGS 

FOR 1995AND 1996 

B-l 
SUMMARY OF WHOLESALE PRICES AND FISTMATED SAVINGS FOR 1995 

B-2 
SUMMARY OF WHOLFISALE PRICES AND ESTIMATED SAVINGS FOR 1996 

HCPCS Awnage SavingsBased Lowest savings 

Code Medicare AYerage on Actual wholi2sate loll 

Wholesale Avemgt~ Pliee f,4owest 

AtXl0Ullt Price Wholesale Found whwe 

J9217 

57620 

J9265 

JV202 

11 J&4@ 1 

Jw45 

fl440 

00136 

52405 

J1625 

J1561 

57672 

J9293 

59185 

J9m.3 

J3370 L-.- I 

TOTAL, 

Price Price 

$499.72 $414.73 $104,365,435 $409.27 $111,066,902 

$0.41 $0.19 $92,199,355 $0.16 $105,604,026 

$181.32 $148.56 $22,757,465 $140.26 $28,526,148 

$378.29 $329.43 $11,215,983 $317.00 $14,067,894 

$21.701 $2.811 $52,514,021 1 $2.391 $53,670,253 /

$82.76 $67.64 $12,539,724 $64.90 

$154.65 $123.39 $11,592,740 $121.56 

$11.93 $10.37 $10,399,198 $9.31 

$6.08 $4.28 $14,319,348 $3.92 

$170.02 $125.71 $13,399,842 $122.90 

$42.21 $16.65 $24,808,622 $12.50 

$1.23 $0.44 $4,805,175 $0.32 

$172.81 $142.40 $5712,650 $139.91 

$179.45 $156.50 $2,049,320 $152.00 

$207.12 $65.46 $10,513,722 $54.00 

$9.44I $4.42 $43213,709 I I $3.45I 

$447,24i$32 

$14,814,584 

$12,271,393 

$17,440,772 

$17,172,050 

$14,250,690 

$28,833,317 

$5,492,908 

$2,935,141 

$2,451,148 

$11,364,260 

$5,027,227I 

$514,085$563 

$421.00 $96,663,201 

$0.25 $67,530,255 

$155.43 $17,986,896 

$341.85 $8,364,073 

$3.451 $50,724,087 

$70.55 $10,128,000 

$126.00 $10,624,824 

$10.70 $8,195,663 

$4.73 $10,776,959 

$128.00 $12,708,277 

$34.00 $7,967,739 

$0.55 $4,117,563 

$145.38 $2,447,586 

$161.00 $1,647,493 

$76.00 $9,731,464 

$6.45 $2,509,417 I 

$357,776,756 

B-3 
APPENDIX C 

INDIVIDUAL DRUG ALLOWANCES AND SAVINGS PERCENTAGES 

FOR 1995AND 1996 

C-l 
EstimatedMedicare Savingsif AcquisitionCosts 

Were Used for 1995PrescriptionDrug Reimbursement 

c-2 
EstimatedMedicare Savingsif AcquisitionCosts 

Were Used for 1996PrescriptionDrug Reimbursement 

c-3 
APPENDIX D 

HEALTH CARE FINANCING ADMINISTRATION COMMENTS 

D-l 
DEPARTMENT OF HEALTH dr HUMAN SERVICES Health Care Financing Administration 

Deputy Administrator 

Washington. D.C. 20201 

DATE: OCT - I 1997 

TO: June Gibbs Brown 

Inspector General 

FROM: Nancy-Aun Min DeParle N M\T 

Deputy Administrator 

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

Payments for Prescription Drugs,” (OEI-03-97-00290) 

We reviewed the above-referenced report that examines Medicare payments for 

prescription drugs. Medicare allowances for prescription drugs increased 25 percent from 

$1.8 bilhon in 1995 to $2.3 billion in 1996. However, the number of services allowed 

increased only 9 percent between the 2 years. 

Medicare does not pay for over-the-counter drugs or many prescription drugs that are 

self-administered. However, the programwill pay for certain categories of drugs used by 

its beneficiaries. Contracted carriers determine the amounts that Medicare wi.lIpay for the 

drugs based on the lower of the estimated acquisition cost @AC) or the national average 

wholesale price (AWP). The allowed amount is the price that Medicare and its 

~en&%iaries pay a drug supplier. OIG fi.udings indicate that at present, it is the AWP 

that carriers use to develop Medicare reimbursement for prescription drugs. The AWP is 

reported in The Red Book and other pricing publications and databases used by the 

pharmaceutical industry. The EAC is determined based orrsurveys of the actual invoice 

prices paid for the drug. 

The findings contained iu the report indicate that Medicare is making excessive payments 

for prescription drugs. The published AWPs currently used by Medicare carriers to 

determine reimbursement do not resemble the actual wholesale prices which are available 

to the physician and supplier communities that bill for these drugs. 

D-2 
2 

OIG suggests that the Health Care Financing Administration (HCFA): (1) reexamine its 

Medicare drug reimbursement methodologies, with the goal of reducing payments; and 

(2) require all carriers to reimburse a uniform allowed amount for each HCFA Common 

Procedural Coding System (HCPCS) drug code. 

HCFA concurs with OIG’s recommendations. Our detailed comments are as follows: 

OIG Recommendation 1 

HCFA should require all carriers to reimburse a uniform allowed amount for each .- HCPCS drug code. 

HCFA Response 

We concur. HCFA agrees with OIG’s findings and recommendations contained in this 

report. HCFA convened a Workgroup to develop an electronic file consisting of the 

AWPs for drugs covered by Medicare. HCFA will then distribute this file to Medicare 

contractors for their use in paying claims for drugs. 

OIG Recommendation 2 

HCFA should reexamine its Medicare drug reimbursement methodologies, with the goal 

of reducing payments as appropriate. 

We concur. We agree with OIG’s fmdings and recommendations. We included a 

provision in the President’s 1998 budget bill that would have eliminated the markup for 

drugs billed to Medicare by requiring physicians to bill the program the actual acquisition 

cost for drugs. Unfortunately, this provision was not enacted, but we will pursue this 

policy in other appropriate ways. 

D-3