This is the accessible text file for GAO report number GAO-05-72 
entitled 'Medicare: Appropriate Dispensing Fee Needed for Suppliers of 
Inhalation Therapy Drugs' which was released on October 12, 2004.

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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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