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United States General Accounting Office: 


Before the Subcommittee on Health, Committee on Finance, U.S. Senate: 

For Release on Delivery: 
Expected at 10:00 a.m. 
Thursday, March 14, 2002: 

Medicare Outpatient Drugs: 

Program Payments Should Better Reflect Market Prices: 

Statement of Laura A. Dummit: 
Director, Health Care—Medicare Payment Issues: 


Mr. Chairman and Members of the Subcommittee: 

I am pleased to be here as you discuss Medicare's payments for covered 
outpatient prescription drugs. As you know, Medicare pays for only a 
limited number of outpatient drugs and biologicals-—largely those that 
cannot be self-administered or require certain medical equipment to be 
administered.[Footnote 1] The covered drugs are typically provided by 
a physician, as is the case for chemotherapy drugs, or through 
pharmacy suppliers, as for respiratory drugs. 

Medicare's payments for covered drugs have been scrutinized for 
several years. Recent studies by the Department of Justice and the 
Office of the Inspector General (OIG) of the Department of Health and 
Human Services (HHS) show that Medicare's payment for covered 
outpatient drugs in some cases is significantly higher than the actual 
costs to the physicians and pharmacy suppliers who bill Medicare for 
them.[Footnote 2] Yet attempts to reduce these payments have been met 
with provider claims that overpayments for the drugs are needed to 
cover underpayments for administering or delivering them. In September 
2000, the Health Care Financing Administration (HCFA)-—now the Centers 
for Medicare and Medicaid Services (CMS)[Footnote 3]-—took steps to 
reduce Medicare's payment for covered outpatient drugs by authorizing 
Medicare carriers, the contractors that pay drug claims, to use prices 
obtained in Justice Department investigations of providers' drug 
acquisition costs in setting payment rates. HCFA retracted this 
authority in November 2000 following concerns raised by providers that 
reducing Medicare's drug payments could affect beneficiary access to 
these drugs and related services. In December 2000, as part of recent 
Medicare legislation,[Footnote 4] the Congress directed us to study 
Medicare's payments for covered outpatient drugs and make 
recommendations for payment methodology refinements. In September 
2001, we reported our findings and made recommendations.[Footnote 5] 
In October 2001, we also reported on the adequacy of Medicare payments 
to oncologists for administering chemotherapy drugs as directed by the 
Congress.[Footnote 6] 

My remarks today will focus on (1) Medicare payment policies for 
covered outpatient drugs and related services to administer or deliver 
the drugs and (2) opportunities to improve the appropriateness of 
Medicare's payments by adapting key features of other federal payers' 
reimbursement policies. My comments are based primarily on our studies 
of Medicare payments for covered outpatient drugs and for administering

In summary, Medicare's payment for covered outpatient drugs is 
significantly higher than prices widely available to providers. 
Medicare's method for establishing drug payments is flawed. Medicare 
pays 95 percent of the average wholesale price (AWP), which, despite 
its name, is neither an average nor a price that wholesalers charge. 
Instead, it is a number that manufacturers derive using their own 
criteria; there are no requirements or conventions that AWP reflect 
the price of any actual sale of drugs by a manufacturer. Manufacturers 
report AWPs to organizations that publish them in drug price 
compendia, and Medicare carriers base providers' payments on these 
published AWPs. 

We found that widely available prices at which providers could 
purchase drugs in 2001 were substantially below AWP. For both 
physician-billed drugs and pharmacy supplier-billed drugs, Medicare 
payments often far exceeded widely available prices. Despite concerns 
that the discounts available to large purchasers would not be 
available to physicians with a small number of drug claims, these 
physicians with low volumes reported that their purchase prices were 
the same or less than the widely available prices we documented. 

Physicians and pharmacy suppliers contend that the excess payments for 
covered drugs are necessary to offset what they claim to be 
inappropriately low Medicare payments or no such payments for services 
related to the administration or delivery of these drugs. For 
administering physician-billed drugs, such as those used in 
chemotherapy, Medicare makes explicit payments under the physician fee 
schedule, typically through the practice expense component of the 
payment. Our October 2001 report on practice expense payments under 
the fee schedule showed that, overall, payments to oncologists 
relative to their estimated practice expenses were comparable to those 
for all specialties. But we also found that HCFA made inappropriate 
modifications to its basic method of setting these payments, which 
resulted in a lowering of the average fees paid for the administration 
of chemotherapy. 

While physicians receive an explicit payment for administering drugs, 
Medicare's payment policies for delivering pharmacy supplier-billed 
drugs and related equipment are uneven. Pharmacy suppliers billing 
Medicare receive a dispensing fee for one drug type—inhalation therapy 
drugs—but there are no similar payments for the other covered drugs, 
such as infusion therapy or covered oral drugs. Suppliers do receive 
an additional Medicare payment for the rental or purchase of durable 
medical equipment (DME) and related supplies that are used to 
administer drugs, such as inhalation and infusion therapy, that 
require DME. However, in 1998 we reported two problems with the 
program's payments for DME—-a wide variety of products may be covered 
under a single fee and fee schedule allowances were out of line with 
current market prices.[Footnote 7] These problems may result in 
overpayments that implicitly compensate for some service delivery 
costs not covered by Medicare. 

Other payers and purchasers, such as private health plans and the 
Department of Veterans Affairs (VA), employ different approaches in 
paying for or purchasing drugs that may be instructive for Medicare. 
In particular, VA uses the leverage from the volume of federal drug 
purchases to secure verifiable data on actual market transactions and 
it uses the prices paid by manufacturers' best customers to set 
Federal Supply Schedule (FSS) prices. VA also uses competitive bidding 
to obtain lower prices for certain products for its own facilities. 
These approaches may be instructive for Medicare provided that they 
are adopted in ways that reflect Medicare's unique responsibilities 
and characteristics. 

In our view, Medicare should pay for each service appropriately and 
not rely on overpayments for some services to offset inadequate 
payments for complementary services. Our recommendation that Medicare 
begin to establish payment rates using information about actual market 
transactions for covered drugs at levels that reflect providers' 
acquisition costs is consistent with this principle. We have also 
recommended that the CMS administrator use consistent methods in 
setting physician practice expense fees for all services, including 
those for administering chemotherapy. 


While the traditional Medicare program does not have a comprehensive 
outpatient prescription drug benefit, the program does cover roughly 
450 outpatient drugs. The outpatient drugs with the highest Medicare 
payments and billing volume fall into three categories: those that 
physicians bill for and that are typically provided in a physician 
office (such as chemotherapy drugs); those that pharmacy suppliers 
bill for and that are administered through DME, such as a respiratory 
drug given in conjunction with a nebulizer;[Footnote 8] and those that 
are also billed by pharmacy suppliers but are patient-administered and 
covered explicitly in statute.[Footnote 9] In 1999, spending for 
Medicare-covered outpatient prescription drugs totaled almost $4 
billion.[Footnote 10] 

Small Number of Products Accounts for Majority of Program Spending and 

Although Medicare reimburses providers for roughly 450 outpatient 
drugs, spending is concentrated on a small number of products billed 
by pharmacy suppliers and a few physician specialties. For example, 
just 35 drugs accounted for 82 percent of Medicare spending and 95 
percent of the claims volume in 1999. These 35 products included 
certain injectible drugs to treat cancer, inhalation therapy drugs, 
and oral immunosuppressive drugs, such as those used by organ 
transplant patients. Physician-billed drugs accounted for the largest 
share of Medicare program spending, while pharmacy supplier-billed 
drugs constituted the largest share of the billing volume. Drugs 
provided in physician offices accounted for more than 75 percent of 
total Medicare spending for drugs in 1999 and just three specialties—
hematology oncology, medical oncology, and urology—submitted claims 
for 80 percent of the total physician billings for outpatient drugs. 
By contrast, pharmacy suppliers accounted for more than 80 percent of 
Medicare drug billing volume and less than 20 percent of corresponding 
payments. Two inhalation therapy drugs accounted for 88 percent of the 
Medicare billing volume for pharmacy-supplied drugs administered in a 
patient's home.[Footnote 11] 

Medicare Payments for Drugs Are Based on "Prices" Set by Manufacturer: 

Medicare bases its reimbursements to physicians and other providers 
for a covered outpatient drug on the product's AWP, with Medicare
beneficiaries contributing 20 percent of the payment. The AWP, 
however, is neither "average" nor "wholesale;" it is simply a number 
assigned by the product's manufacturer. The AWP is often described as 
a "list price," "sticker price," or "suggested retail price," 
reflecting that it is not necessarily the price paid by a purchaser or 
a consistently low, or "wholesale," price. 

Because the term AWP is not defined in law or regulation, the 
manufacturer is free to set an AWP at any level, regardless of the 
actual price that purchasers pay. Manufacturers periodically report 
AWPs to publishers of drug pricing data. While there is no required 
frequency for manufacturers to report AWPs, most publishers said they 
attempt to update AWPs at least annually. The Medicare-allowed amount, 
or payment level, for each HCFA Common Procedure Coding System (HCPCS)-
coded drug is 95 percent of its AWP.[Footnote 12] Given the latitude 
manufacturers have in setting AWPs, these payments need not be related 
to market prices that physicians and suppliers actually pay for the 

Varying Payment Arrangements Affect Providers' Final Purchase Price: 

Common drug purchasing arrangements can substantially reduce a 
provider's actual acquisition price for a drug. Physicians and 
suppliers may belong to group purchasing organizations (GPO) that 
negotiate prices with wholesalers or manufacturers on behalf of GPO 
members. GPOs may negotiate different prices for different purchasers, 
such as physicians, suppliers, or hospitals. In addition, providers 
can purchase covered outpatient drugs from general or specialty 
pharmaceutical wholesalers or can have direct purchase agreements with 
manufacturers. In these arrangements, providers may benefit from 
transactions, including rebates and "chargebacks" that also reduce the 
actual costs providers incur. Rebates offered by drug manufacturers or 
wholesalers may be based on the number of different products purchased 
over an extended period. Under a chargeback arrangement, the provider 
negotiates a price with the manufacturer that is lower than the price 
the wholesaler normally charges for the product, and the provider pays 
the wholesaler the negotiated price. The manufacturer then pays the 
wholesaler the difference between the wholesale price and the price 
negotiated between the manufacturer and provider. 

Medicare's Payment for Covered Outpatient Drugs Is Significantly 
Higher than Prices Widely Available to Providers: 

For the outpatient drugs accounting for the bulk of Medicare spending 
and claims, Medicare payments in 2001 were almost always considerably 
higher than wholesalers' prices widely available to physicians and 
suppliers.[Footnote 13] This was true regardless of whether there were 
competing drug products or whether a particular drug was available 
from only one manufacturer. Physicians who had few Medicare claims for 
covered drugs were able to obtain these wholesalers' prices or even 
more favorable prices. Physicians and pharmacy suppliers told us that 
the higher payments are necessary to cover costs of administering and 
dispensing their drugs that Medicare does not pay. Our work indicates 
that CMS's method of computing Medicare fees for physician-
administered drug claims, which are submitted primarily by 
oncologists, inappropriately reduced those fees. Furthermore, 
Medicare's coverage and payment policies for pharmacy supplier-billed 
drugs are uneven: Medicare pays a dispensing fee for delivering some 
pharmacy supplier-billed drugs; for others, however, Medicare makes no 
explicit payment for delivery and administration services. 

Wide Disparities Exist Between Drug Acquisition Costs and Medicare 

Physician-billed drugs account for the bulk of Medicare spending on 
outpatient drugs. Of those billed by physicians, drugs used to treat 
cancer accounted for most of Medicare's expenditures. The prices 
available to physicians through wholesaler and GPO catalogs are far 
lower than Medicare's payment. The catalog prices ranged from 13 
percent to 34 percent less than AWP for most drugs that we examined 
and up to 86 percent less for one. These prices indicate that 
Medicare's payments for physician-administered outpatient drugs were 
at least $532 million higher than providers' potential acquisition 
costs in 2000. Further, the overpayment is likely even greater because 
additional reductions provided to certain purchasers through 
chargebacks, rebates, and other discounts drive down the actual 
acquisition costs to providers even more. 

Concerns have been expressed that providers who had few beneficiaries 
requiring chemotherapy drugs either could not or do not obtain such 
favorable prices. Therefore, we surveyed a sample of physicians who 
billed Medicare for low volumes of chemotherapy drugs to see if they 
were able to obtain discounts similar to those of providers with a 
high volume of claims. More than one-third of these physicians who 
billed for a low volume of drugs actually belonged to large, hospital-
based, or national chain oncology practices that likely had access to 
widely available drug discounts. The low-volume providers who 
responded to our survey reported similar or better discounts than the 
widely available prices we documented, although these discounts may 
not be as high as those obtained by high-volume purchasers. 

Inhalation therapy drugs administered through DME and oral 
immunosuppressive drugs represent most of the high-expenditure, high-
volume drugs billed to Medicare by pharmacy suppliers. As with 
physician-billed drugs, Medicare's payments for pharmacy supplier-
billed drugs generally far exceeded the prices available to these 
suppliers. Further, the discounts we found were largest for products 
that could be obtained from more than one source. Based on the 
discounts for six drugs billed primarily by pharmacy suppliers, we 
found that Medicare's payments were at least $483 million more than 
what the suppliers potentially paid in 2000. Specifically, two DME-
administered drugs, albuterol and ipratropium bromide, that accounted 
for most of the pharmacy supplier-billed drugs paid for by Medicare 
were available to pharmacy suppliers at prices that averaged, 
respectively, 85 percent and 78 percent less than AWP. Two other high-
volume DME-administered drugs had prices averaging 69 percent and 72 
percent less than AWP. Two of the high-volume oral immunosuppressives 
were available from wholesalers with average discounts of 14 percent 
and 77 percent. Although wholesale price information on the two other 
oral drugs was not available, retail prices from online pharmacies 
were as much as 13 percent and 8 percent below AWP. 

Based on our findings, we recommended that Medicare revise its drug 
payment policies to more closely parallel market prices that providers 
actually pay to acquire drugs. To set such prices, Medicare needs to 
use information on actual market prices, accounting for rebates and 
other discounts. It is important in setting payment levels to be 
mindful that providers' ability to secure discounts likely varies, and 
that prices need to be sufficient to ensure that beneficiary access is 
not compromised. 

Current Drug Payments Called Necessary to Offset Inadequate Payments 
for Related Services: 

Physicians and pharmacy suppliers contend that the excess in 
Medicare's payments for covered outpatient drugs compensates for 
related service costs inadequately reimbursed or not explicitly 
covered at all. Medicare payment policies for administering or 
delivering a drug vary, depending on who provides the drug to the 
patient. Physicians are compensated directly for drug administration 
through the physician fee schedule. Pharmacy suppliers are compensated 
for dispensing inhalation therapy drugs used with a nebulizer, which 
make up the majority of their Medicare outpatient drug claims. No 
explicit payments are made to pharmacy suppliers for dispensing other 
drugs, but the suppliers receive payments for equipment and supplies 
associated with DME-administered drugs. 

Medicare pays physicians based on a fee schedule that includes rates 
for administering chemotherapy. Payments for chemotherapy 
administration are important because chemotherapy drugs represent the 
bulk of Medicare payments for physician-administered drugs. Medicare's 
payment for chemotherapy administration is usually determined by the 
practice expense component of the fee schedule, as there is generally 
no direct physician involvement with these services.[Footnote 14] 
Payments for practice expenses were revised beginning in 1999. These 
payments, which had been based on charges physicians had billed in 
prior years, were recomputed to reflect the relative resources 
required to provide each service. Implementation of these resource-
based practice expense payments has been controversial. This is in 
part because the Congress required that payments be budget neutral so 
that if one specialty's fees increased on average, some others would 
have to be reduced. Such redistributions have occurred, and some are 
significant. However, Medicare's physician payments were deemed 
adequate in the aggregate, as almost all physicians participated in 
Medicare and accepted the program's fees as payment in full, so that 
budget neutrality appeared unlikely to cause access problems for 

Oncologists argue that Medicare's payments for administering 
chemotherapy are inappropriately low and that the excess Medicare drug 
payments based on the AWP are needed to offset their losses. Yet, 
oncology is one of the specialties to gain from the introduction of 
new practice expense payments under the physician fee schedule. In our 
October 2001 study on physicians' practice expenses under Medicare's 
fee schedule, we showed that practice expense payments to oncologists 
were 8 percent higher than they would have been if the prior payment 
method had been maintained; we also showed that overall oncologists' 
payments relative to their estimated practice expenses were close to 
the average for all specialties. 

While oncologists do not appear disadvantaged overall under the fee 
schedule, adjustments that HCFA made to the basic method of computing 
payments reduced fees for some oncologists' services, particularly 
chemotherapy administration. In those adjustments, HCFA modified the 
basic method in computing payments for services delivered without 
direct physician involvement, like much of chemotherapy 
administration.[Footnote 15] The modifications were intended to 
correct perceived low payments for these services, but instead 
resulted in reduced payments for some of these services, particularly 
those provided by oncologists. Further, the agency reduced oncology's 
reported supply expenses, one of the data elements used to compute 
fees, to keep from paying twice for drugs that are reimbursed 
separately by Medicare. Oncologists acknowledge that the supply 
expense estimate needed to be reduced, but argue that the reduction 
was too large. We recommended in our October 2001 report that

CMS revert to using the basic methodology to determine practice 
expense payments for all services and develop the appropriate data to 
more accurately estimate oncology supply expenses. If these 
recommendations had been followed in 2001, we estimate that payments 
to oncologists would have been about $51 million higher. 

Similar to the physicians who bill for outpatient drugs, pharmacy 
suppliers and their representatives contend that the overpayments for 
DME-related drugs are needed to compensate them for costs not covered 
by Medicare—that is, clinical, administrative, and other labor costs 
associated with delivering the drug. These include costs for billing 
and collection; facility and employee accreditation; licensing and
certifications; and printed patient education materials. Medicare pays 
a $5 dispensing fee for inhalation therapy drugs used with a 
nebulizer, the vast majority of the pharmacy-supplied drugs. The fee 
is higher than dispensing fees paid by pharmacy benefit managers for 
private insurance plans, which average around $2, and comparable to 
fees paid by state Medicaid programs, which range from $2 to more than 

Besides payments for the DME-related drugs, pharmacy suppliers may 
receive additional compensation through the payment for DME and 
related supplies. Our prior work shows that, for two reasons, Medicare 
DME and supply payments may exceed market prices.[Footnote 16] First, 
because of an imprecise coding system, Medicare carriers cannot 
determine from the DME claims they process which specific products the 
program is paying for. Medicare's coding system groups products that 
may have significantly different characteristics and, therefore, 
different prices. Medicare, however, pays one fee for all products 
classified under a single billing code, regardless of whether their 
market prices are below or above that fee.[Footnote 17] Second, DME 
fees are often out of line with current market prices. Until recently, 
DME fees had generally been adjusted only for inflation since the 
process required to change the fees for any other reason was lengthy 
and cumbersome. As a result, payment levels may not reflect changes in 
technology and other factors that could significantly change market 

Other Purchasers' Practices Are Instructive for Reforming Medicare 
Payments for Covered Outpatient Drugs: 

Private insurers and federal agencies, notably VA, employ varying 
approaches in paying for drugs, generally using the leverage of their 
volume and competition to secure better prices. While private payers 
can negotiate with some suppliers to the exclusion of others and 
arrive at terms without clear criteria or a transparent process to 
secure lower prices, some of these practices would not be acceptable 
for a public program like Medicare, given the program's size and need 
to ensure access for providers and beneficiaries. VA uses the leverage 
of federal purchasers to secure verifiable data on actual market 
transactions by private purchasers to establish FSS prices for federal 
agency and public hospital purchasers. VA also uses competition to 
secure even lower prices in purchasing selected drugs for its own 
facilities. In considering how these approaches might prove 
instructive for Medicare, the program's unique responsibilities and 
characteristics need to be carefully considered to avoid untoward 
consequences for beneficiaries and providers. 

VA sets FSS prices based on actual prices paid by private purchasers—
specifically, the prices that drug manufacturers charge their "most-
favored" private customers.[Footnote 18] In exchange for state 
Medicaid programs covering their drugs, manufacturers agree to offer 
VA and other government purchasers drugs at these prices. To enable VA 
to determine the most-favored customer price, manufacturers provide 
information on price discounts and rebates offered to domestic 
customers and the terms and conditions involved, such as length of 
contract periods and ordering and delivery practices.[Footnote 19] 
Manufacturers must also be willing to supply similar information to 
CMS to have their drugs covered by Medicaid. The information is the 
basis for rebates required by the Medicaid program. With Congressional 
sanction, CMS might utilize this information to determine appropriate 
prices for Medicare that would be based on actual prices being paid in 
the market. Medicare prices most likely could not be the prices paid 
by most favored customers, but would need to be high enough to assure 
access for all beneficiaries. 

VA has been successful in using competitive bidding to obtain even 
more favorable prices for certain drugs for its own facilities. 
[Footnote 20] Through these competitive bids, VA has obtained national 
contracts for selected drugs at prices that are even lower than FSS 
prices. These contracts seek to concentrate the agency's purchase on 
one drug within a class of therapeutically equivalent products for the 
agency's national formulary. In 2000, VA contract prices averaged 33 
percent lower than corresponding FSS prices. 

Medicare's use of competition has been restricted to several 
demonstration projects authorized by the Balanced Budget Act of 
1997.[Footnote 21] In one of these demonstrations under way in San 
Antonio, Texas, suppliers bid to provide nebulizer drugs, such as 
albuterol, to Medicare beneficiaries. While Medicare normally allows 
any qualified provider to participate in the program, only 11 bidders 
for nebulizer drugs were selected to participate under the 
demonstration. In exchange for restricting their choice of providers 
to the 11 suppliers, beneficiaries are not liable for any differences 
between what suppliers charge and what Medicare allows. Preliminary 
CMS information on the San Antonio competitive bidding demonstration 
suggests no reported problems with access and a savings of about 26 
percent for the inhalation drugs. Expanding competitive bidding for 
additional drugs could be beneficial. However, use of competitive 
bidding would not be feasible for all drugs, for example, those that 
have no or few therapeutic equivalent alternatives, which is the case 
for many chemotherapy drugs. 

Concluding Observations: 

Our September 2001 study on Medicare payments for outpatient drugs 
shows that Medicare payments and Medicare beneficiary copayments to 
providers for these drugs are much higher than necessary, given what 
the providers likely paid to purchase these drugs from manufacturers, 
wholesalers, or other suppliers. Unlike the market-based fees paid by 
VA and other federal agencies, Medicare's fees are based on AWP, which 
is a manufacturer-reported amount that generally does not reflect 
actual transactions between seller and purchaser. Physicians contend 
that the profits they receive from Medicare's payments for outpatient 
drugs are needed to compensate for inappropriately low Medicare fees 
for most drug administration services. Similarly, the case argued by 
some pharmacy suppliers for Medicare's high drug payments is that not 
all of their costs of dispensing the drugs are covered. 

If Medicare were to follow the principle of paying for each service 
appropriately and incorporate lessons from other payers in setting 
fees for outpatient drugs, the program would use information on actual 
market prices, accounting for rebates and discounts, to establish its 
payments for drugs. Manufacturers whose drugs are used by veterans or 
Medicaid recipients are already required to provide this information 
to VA and CMS. Medicare could also determine market-based fees for 
certain drugs through competitive bidding. If drug payments are tied 
closer to providers' likely acquisition costs, Medicare would need to 
ensure that separate and appropriate payments are made to pay for the 
administration and delivery of covered drugs. Changes to Medicare 
payments for chemotherapy administration under the current physician 
fee schedule are needed to make these payments comparable to payments 
for other services. While Medicare also provides a separate payment 
for the dispensing of inhalation therapy drugs, dispensing fees for 
other drugs that physicians do not administer need to be considered. 
Different methods of determining these payments may be necessary 
because of differences in the way certain drugs are supplied and 
administered. Paying for these services explicitly would enable 
Medicare to eliminate implicit payments that may have been made 
through excessive payments for DME and the drugs associated with the 
DME payment. 

Any change to Medicare's payments, particularly a reduction in fees, 
for covered outpatient drugs or related administration or delivery 
services needs to be accompanied by an ongoing assessment of whether 
the new fees adequately support Medicare beneficiaries' access to the 
drugs and services. Such monitoring should involve examining recent 
use of these services so that prompt fee adjustments can be made if 
access problems are found. 

Mr. Chairman, this concludes my prepared statement. I would be happy 
to answer any questions that you or other Subcommittee Members may 

Contact and Acknowledgments: 

For further information regarding this testimony, please contact me at 
(202) 512-7119. Kathryn Linehan, James Mathews, and Michael Rose made 
contributions to this statement. 

[End of section] 


[1] For the remainder of this statement, we will refer to "drugs and 
biologicals" covered under Medicare part B, which generally covers 
physician and outpatient hospital services, as "outpatient drugs." 

[2] For example, see U.S. Department of Health and Human Services, 
Office of the Inspector General, Medicare Reimbursement of Albuterol, 
OEI-03-00-00311 (Washington, DC: June 2000) and Medicare Reimbursement 
of Prescription Drugs, OEI-03-00-00310 (Jan. 2001). 

[3] Our statement refers to HCFA when discussing actions taken under 
that name. 

[4] The Medicare, Medicaid, and SCRIP Benefits Improvement and 
Protection Act of 2000 (Pub. L. No. 106-554, App. F, 106 Stat. 2763, 

[5] U.S. General Accounting Office, Medicare: Payments for Covered 
Outpatient Drugs Exceed Providers' Costs, [hyperlink,] (Washington, D.C.: Sept. 21, 

[6] This study was mandated in section 213 of the Medicare, Medicaid, 
and SCRIP Balanced Budget Refinement Act of 1999 (Pub. L. No. 106-113, 
App. F, 113 Stat. 1501, 1501A-350). See U.S. General Accounting 
Office, Medicare Physician Fee Schedule: Practice Expense Payments to 
Oncologists Indicate Need for Overall Refinements, [hyperlink,] (Washington, DC: Oct. 31, 2001). 

[7] See U.S. General Accounting Office, Medicare: Need to Overhaul 
Costly Payment System for Medical Equipment and Supplies, [hyperlink,] (Washington, DC: May 12, 

[8] A nebulizer is a device driven by a compressed air machine. It 
allows the patient to take medicine in the form of a mist (wet 

[9] Medicare-covered outpatient drugs that can be self-administered 
include such drugs as blood clotting factors and some oral drugs used 
in association with cancer treatment and immunosuppressive therapy. 

[10] Spending is defined as Medicare's total payment, of which the 
program's share is 80 percent and the beneficiaries' share is 20 

[11] These two drugs are ipratropium bromide and albuterol (unit dose 

[12] The payment is based on the AWP for all the drugs having the same 
HCPCS code. A National Drug Code (NDC) identifies an individual drug. 
The Food and Drug Administration assigns the NDCs, which are the 
universal product identifiers for drugs for human use. Each NDC 
specifies a chemical entity, manufacturer, dosage form, strength, and 
package size. For example, a single drug—marketed by one manufacturer 
in one form and strength but in three package sizes—would have three 
NDCs. HCFA defines HCPCS codes, which generally include multiple NDCs. 
For single-source drugs, Medicare's payment is 95 percent of the 
drug's AWP. For multisource drugs, generally those available from 
multiple manufacturers, the payment allowance is 95 percent of the 
lower of (1) the median AWP of all generic forms of the drug or (2) 
the lowest brand name product's AWP. 

[13] We attempted to analyze prices for 35 high-volume and high-
expenditure outpatient drugs, however, our analysis excluded some high-
volume and high-expenditure drugs because of inadequate pricing data. 
Our results are based on wholesaler and GPO prices for 19 physician-
administered drugs and 6 drugs provided primarily by pharmacy 
suppliers. Volume for a drug is measured in terms of the number of 
units provided. 

[14] Practice expenses include the salaries of nurses, technicians, 
and administrative staff, and rent, utilities, equipment, and 
supplies. Practice expenses constitute one of three components in 
Medicare's physician fee schedule. The other two are the physician 
work component and the malpractice component. 

[15] In the case of chemotherapy drugs, the common practice is for a 
nurse employed by a physician to administer the drug and for the 
physician to bill Medicare. 

[16] U.S. General Accounting Office, Medicare: Need to Overhaul Costly 
Payment System for Medical Equipment and Supplies, [hyperlink,] (Washington, DC: May 12, 

[17] The equipment and supply payment is determined from a DME fee 
schedule, whose rates are based on a state-specific fee schedule and 
subject to national minimum and maximum payment limits. 

[18] Under federal procurement regulations, the government seeks to 
obtain a price that is intended to equal or better the price that the 
manufacturer offers its most-favored nonfederal customer under 
comparable terms and conditions. 

[19] Because the terms and conditions of commercial sales vary, there 
may be legitimate reasons why the government does not always obtain 
the most-favored customer price. Hence, under the regulations, VA may 
accept a higher price if it determines that (1) the price offered to 
the government is fair and reasonable and (2) awarding the contract is 
otherwise in the best interest of the government. 

[20] U.S. General Accounting Office, Prescription Drugs: Expanding 
Access to Federal Prices Could Cause Other Price Changes, [hyperlink,] (Washington, DC: August 
7, 2000). 

[21] Pub. L. No. 105-33, §4319, 111 Stat. 251, 392. 

[End of section]