Medicare: Appropriate Dispensing Fee Needed for Suppliers of Inhalation Therapy Drugs
Published: 2004-10-12T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: 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.
section_title: What GAO Found
paragraphs: 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.

section_title: Letter
paragraphs: In response to substantial Medicare overpayments for outpatient drugs,  Congress enacted a revised payment formula in the Medicare Prescription  Drug, Improvement, and Modernization Act of 2003 (MMA) beginning  January 1, 2005.  For the limited number of drugs covered under part B of  the Medicare program, 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.  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, 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.
MMA directed us to study the adequacy of Medicare’s payment for  inhalation therapy.  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  a more complete description of our methodology.  We conducted our work  from May through October 2004 in accordance with generally accepted  government auditing standards.
subsections: section_title: Background
paragraphs: 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.  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) to one based primarily on the  average sales price (ASP) plus 6 percent.  This new payment method is  expected to result in payment rates that are closer to drug acquisition costs.  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, while payment was 95  percent of AWP.
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.  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  inhalation therapy drugs and an appropriate amount for such a dispensing  fee.  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.  A final rule is scheduled for publication in  November 2004.
section_title: Suppliers’ Acquisition Costs Of Inhalation Therapy Drugs Varied Widely
paragraphs: 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.
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.
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.
section_title: Large Variation In Suppliers’ Dispensing Costs Raises Questions About Services Necessary To Dispense Inhalation Therapy Drugs
paragraphs: 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  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.
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, for  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.  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).   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.  For example, suppliers would bill  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.
section_title: Conclusions
paragraphs: 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.
section_title: Recommendation for Executive Action
paragraphs: 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.
section_title: Agency and External Reviewer Comments
paragraphs: 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.
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.
section_title: Scope and Methodology
paragraphs: 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.
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  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.
section_title: Comments From the Centers for Medicare & Medicaid Services
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