Medicare
Appropriate Dispensing Fee Needed for Suppliers of Inhalation Therapy Drugs Gao ID: GAO-05-72 October 12, 2004The 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.
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.
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Report to Congressional Committees:
October 2004:
Medicare:
Appropriate Dispensing Fee Needed for Suppliers of Inhalation Therapy
Drugs:
[Hyperlink, http://www.gao.gov/cgi-bin/getrpt?GAO-05-72]:
GAO Highlights:
Highlights of GAO-05-72, a report to congressional committees:
Why GAO Did This Study:
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 Found:
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.
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.
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.
[End of section]
Contents:
Letter:
Background:
Results in Brief:
Suppliers' Acquisition Costs Of Inhalation Therapy Drugs Varied Widely:
Large Variation In Suppliers' Dispensing Costs Raises Questions About
Services Necessary To Dispense Inhalation Therapy Drugs:
Conclusions:
Recommendation for Executive Action:
Agency and External Reviewer Comments:
Appendixes:
Appendix I: Scope and Methodology:
Appendix II: Comments From the Centers for Medicare & Medicaid
Services:
Tables:
Table 1: Supplier Per Unit Acquisition Costs for Selected Inhalation
Therapy Drugs by Size of Supplier, 2003:
Table 2: Estimated Per Patient Monthly Inhalation Therapy Drug
Dispensing Costs, 2003:
Table 3: Estimated Inhalation Therapy Drug Dispensing Costs, Per 30-Day
and 90-Day Supply, 2003:
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:
Letter October 12, 2004:
Congressional Committees:
In response to substantial Medicare overpayments for outpatient
drugs,[Footnote 1] Congress enacted a revised payment formula in the
Medicare Prescription Drug, Improvement, and Modernization Act of 2003
(MMA) beginning January 1, 2005.[Footnote 2] For the limited number of
drugs covered under part B of the Medicare program,[Footnote 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.[Footnote 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,[Footnote 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.
MMA directed us to study the adequacy of Medicare's payment for
inhalation therapy.[Footnote 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 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.[Footnote 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)[Footnote 8] to one based
primarily on the average sales price (ASP)[Footnote 9] plus 6 percent.
This new payment method is expected to result in payment rates that are
closer to drug acquisition costs.[Footnote 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,[Footnote 11] while payment was 95
percent of AWP.[Footnote 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.[Footnote 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 inhalation therapy drugs and an
appropriate amount for such a dispensing fee.[Footnote 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.[Footnote 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, 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.
Table 1: Supplier Per Unit Acquisition Costs for Selected Inhalation
Therapy Drugs by Size of Supplier, 2003:
Ipratropium bromide;
Suppliers: All (n=12);
Range of per unit average acquisition cost: $0.23 - $0.64.
Ipratropium bromide;
Suppliers: Large (n=4);
Range of per unit average acquisition cost: $0.26 - $0.64.
Ipratropium bromide;
Suppliers: Small (n=8);
Range of per unit average acquisition cost: $0.23 - $0.46.
Albuterol sulfate[A];
Suppliers: All (n=12);
Range of per unit average acquisition cost: $0.04 - $0.08.
Albuterol sulfate[A];
Suppliers: Large (n=4);
Range of per unit average acquisition cost: $0.04 - $0.06.
Albuterol sulfate[A];
Suppliers: Small (n=8);
Range of per unit average acquisition cost: $0.05 - $0.08.
Budesonide[B];
Suppliers: All (n=12);
Range of per unit average acquisition cost: $0.04 - $4.35.
Budesonide[B];
Suppliers: Large (n=4);
Range of per unit average acquisition cost: $0.04 - $3.69.
Budesonide[B];
Suppliers: Small (n=8);
Range of per unit average acquisition cost: $0.24 - $4.35.
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.
[End of table]
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.
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 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:
Patient care costs;
Cost Category: Pharmacy;
Range of per patient monthly costs: $0.10 - $123.73.
Patient care costs;
Cost Category: Packaging and shipping;
Range of per patient monthly costs: $0.32 - $32.61.
Patient care costs;
Cost Category: Delivery;
Range of per patient monthly costs: $0.00 - $17.39.
Patient care costs;
Cost Category: Medication refill and compliance phone calls;
Range of per patient monthly costs: $0.12 - $17.64.
Patient care costs;
Cost Category: Other patient care[A];
Range of per patient monthly costs: $0.00 - $24.04.
Administrative and overhead costs;
Cost Category: Billing/collection;
Range of per patient monthly costs: $2.00 - $9.68.
Administrative and overhead costs;
Cost Category: Rent/mortgage/lease/or other payment for space;
Range of per patient monthly costs: $0.26 - $7.19.
Administrative and overhead costs;
Cost Category: Insurance;
Range of per patient monthly costs: $0.00 - $4.10.
Administrative and overhead costs;
Cost Category: Depreciation;
Range of per patient monthly costs: $0.28 - $3.88.
Administrative and overhead costs;
Cost Category: Utilities;
Range of per patient monthly costs: $0.13 - $3.67.
Administrative and overhead costs;
Cost Category: Storage;
Range of per patient monthly costs: $0.00 - $2.96.
Administrative and overhead costs;
Cost Category: Licensing;
Range of per patient monthly costs: $0.06 - $2.39.
Administrative and overhead costs;
Cost Category: Training;
Range of per patient monthly costs: $0.00 - $0.80.
Administrative and overhead costs;
Cost Category: Taxes;
Range of per patient monthly costs: $0.00 - $30.92.
Administrative and overhead costs;
Cost Category: Bad debt;
Range of per patient monthly costs: $0.00 - $9.28.
Administrative and overhead costs;
Cost Category: Other administrative and overhead[B];
Range of per patient monthly costs: $0.21 - $29.84.
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.
[End of table]
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,[Footnote 16] 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.[Footnote 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).[Footnote 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.[Footnote 19] 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.
Table 3: Estimated Inhalation Therapy Drug Dispensing Costs, Per 30-Day
and 90-Day Supply, 2003:
Duration of Supply: Per patient 30-day costs with 30-day supply;
Range of costs: $6.96 - $203.75.
Duration of Supply: Per patient 90-day costs with 90-day supply[A];
Range of costs: $12.61 - $267.91.
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.
[End of table]
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.
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 [Hyperlink, 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.
Signed by:
Laura A. Dummit:
Director, Health Care--Medicare Payment Issues:
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:
[End of section]
Appendixes:
Appendix I: Scope and Methodology:
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.
[End of section]
Appendix II: Comments From the Centers for Medicare & Medicaid
Services:
DEPARTMENT OF HEALTH & HUMAN SERVICES:
Centers for Medicare & Medicaid Services:
Administrator:
Washington, DC 20201:
DATE: OCT 8 2004:
TO: Laura A. Dummit:
Director, Health Care-Medicare Payment Issues:
Signed by:
FROM: Mark B. McClellan, M.D., Ph.D.:
Administrator:
Centers for Medicare & Medicaid Services:
SUBJECT: General Accounting Office Draft Report (GAO), MEDICARE.
Appropriate Dispensing Fee Needed for Suppliers of Inhalation Therapy
Drugs, (GAO-05-72):
Thank you for the opportunity to review and comment on the GAO's draft
report entitled, "MEDICARE: Appropriate Dispensing Fee Needed for
Suppliers of Inhalation Therapy Drugs."
We are committed to ensuring that our beneficiaries have appropriate
access to inhalation drugs and understand the vital role these
medications play in the care of patients with respiratory illnesses.
Lung diseases such as chronic obstructive pulmonary disease (COPD)
affect large numbers of Medicare beneficiaries. The COPD is the fourth
largest cause of death in America behind heart disease, certain
cancers, and stroke. We hope to reduce the number of new COPD cases by
educating Americans about the disease, its causes, and ways to prevent
it. We hope to improve the lives of Medicare beneficiaries and improve
beneficiary access to treatment for those who already suffer from these
conditions.
Depending on an individual's age and health, a number of steps can be
taken to treat or prevent COPD. Because approximately 85 percent of
those with COPD are smokers_, the first step to avoid the disease is to
stop smoking. Smoking has been linked to a large number of health
problems and is a leading cause of cancer and pulmonary disease. The
Department of Health and I luman Services (HHS) has been actively
encouraging Americans to quit smoking through its smoking cessation
initiatives. Americans who quit smoking will enjoy longer, healthier
lives and avoid diseases such as COPD.
We have also recently approved services to address the needs of
Americans suffering from COPD, including lung-volume reduction surgery,
which. performed in more serious cases, removes the diseased lung
tissue, allowing the rest of the lung to function better. Specifically.
effective January 1, 2004, Medicare expanded coverage of lung volume
reduction surgery to include patients who either have severe, upper-
lobe emphysema, or have severe, non-upper-lobe emphysema with low
exercise capacity.
A number of drugs are available to treat the persons with asthma or who
develop COPD. These include drugs, often inhaled, that expand the
bronchial tubes and allow the patient to breathe more freely. Depending
on the needs of the individual patient, these medications can be
delivered using nebulizers or metered dose inhalers (MDIs). While
nebulizers have long been covered under Medicare Part B, the Medicare
Modernization Act (MMA) expanded access to MDIs beginning in 2006
through the new Medicare Part D drug benefit.
We recognize many patients require the use of nebulizers and that
nebulizers will continue to play an important role in inhalation
therapy even after coverage of MDIs begins in 2006. We, therefore,
agree with the GAO recommendation that we evaluate the costs of
dispensing inhalation therapy drugs used in nebulizers and modify the
dispensing fee, if warranted, to ensure that the fee appropriately
accounts for the costs necessary to dispense these drugs.
We note the extreme variation that the GAO found in the costs of
dispensing these nebulized drugs to Medicare beneficiaries: GAO found
that the 2003 per patient monthly costs of dispensing these medications
ranged from a low of $7 to a high of $204. We believe that before a
final determination can be made as to the dispensing fee for inhalation
drugs, we need to more fully understand the reasons behind the current
variability in the dispensing of these drugs. We intend to work with
those concerned with inhalation therapy and our partners in the
Department of Health and I luman Services to explore this issue more
fully.
In the interim, the GAO's analysis has provided us with information
that we will carefully consider with the comments we received from the
public on our August 5, 2004 proposed rule policy on inhalation
dispensing fees. A number of commenters on our proposed rule cited an
industry-sponsored study on the costs of delivering inhalation drug
services. Other comments and publicly available cost information were
also available to us. After reviewing the comments and the information
from the GAO survey and other public sources, we believe that $55.00 to
$64.00 per month is a reasonable range for a 2005 fee.
We also appreciate the GAO's work in surveying the acquisition cost of
the suppliers of the inhalation drugs. As with dispensing costs, the
GAO found that the acquisition cost of these drugs varied widely. The
GAO found that acquisition costs of the two most widely utilized drugs,
ipratropium bromide and albuterol sulfate, ranged from $0.23 to $0.64
for ipratropium bromide and from $0.04 to $0.08 for albuterol sulfate.
The 2005 Medicare payments for ipratropium bromide and albuterol
sulfate will be based on manufacturers' quarterly submissions of
average sales price data. 1 he Medicare payment each quarter will be
based on the average sales price data plus 6 percent. When we compare
the acquisition costs of ipratropium bromide and albuterol sulfate to
the Medicare payment rates based on the submission of manufacturer's
average sales price data for the second quarter of 2004, we find that
the Medicare payment rates would be solidly inside the acquisition cost
range found by the GAO.
The GAO also found that acquisition cost was not necessarily related to
the size of the supplier. As we seek to encourage prudent purchasing
under the ASP+6 percent payment system, we intend to further explore
the factors influencing drug acquisition costs.
We look forward to working with the GAO as we address these important
issues and ensure appropriate access to inhalation drugs for our
beneficiaries who need them.
[End of section]
(290374):
FOOTNOTES
[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).
[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.
[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).
[10] H.R. Conf. Rep. No. 108-391, at 582-84 (2003), reprinted in 2003
U.S.C.C.A.N. 1808, 1950-51.
[11] GAO, Medicare: Payments for Covered Outpatient Drugs Exceed
Providers' Cost, GAO-01-1118 (Washington, D.C.: Sept. 21, 2001).
[12] In implementing MMA, CMS set payments for inhalation therapy drugs
furnished in 2004 at 80 to 85 percent of AWP.
[13] These services are not required by Medicare.
[14] 69 Fed. Reg. 47,488, 47,549 (2004).
[15] 69 Fed. Reg. 47,488, 47,549 (2004).
[16] Drug compounding is the process of mixing, combining, or altering
ingredients to create a customized medication for an individual
patient.
[17] 69 Fed. Reg. 47,488, 47,549 (2004).
[18] 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.
[19] In contrast, administrative and overhead costs generally are not
dependent on the frequency with which the drugs are dispensed.
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