Medicare: Appropriate Dispensing Fee Needed for Suppliers of	 
Inhalation Therapy Drugs (12-OCT-04, GAO-05-72).		 
                                                                 
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.				 
-------------------------Indexing Terms------------------------- 
REPORTNUM:   GAO-05-72						        
    ACCNO:   A13052						        
  TITLE:     Medicare: Appropriate Dispensing Fee Needed for Suppliers
of Inhalation Therapy Drugs					 
     DATE:   10/12/2004 
  SUBJECT:   Administrative costs				 
	     Cost analysis					 
	     Drugs						 
	     Health care programs				 
	     Health insurance cost control			 
	     Overpayments					 
	     Payments						 
	     Pharmaceutical industry				 
	     Procurement practices				 
	     Medical services rates				 
	     Health care costs					 

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GAO-05-72

                 United States Government Accountability Office

                     GAO Report to Congressional Committees

October 2004

MEDICARE

  Appropriate Dispensing Fee Needed for Suppliers of Inhalation Therapy Drugs

                                       a

GAO-05-72

[IMG]

October 2004

MEDICARE

Appropriate Dispensing Fee Needed for Suppliers of Inhalation Therapy Drugs

  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.

                 United States Government Accountability Office

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

1 3 5

6

8 11 12 12

Appendixes                                                              
               Appendix I:              Scope and Methodology              15 
                              Comments From the Centers for Medicare &     
              Appendix II:                    Medicaid                     
                                              Services                     18 
                            Table 1: Supplier Per Unit Acquisition Costs   
     Tables                            for Selected Inhalation             
                               Therapy Drugs by Size of Supplier, 2003      7 
                               Table 2: Estimated Per Patient Monthly      
                                       Inhalation Therapy Drug             
                                       Dispensing Costs, 2003               9 
                             Table 3: Estimated Inhalation Therapy Drug    
                                        Dispensing Costs, Per              
                                   30-Day and 90-Day Supply, 2003          11 

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

This is a work of the U.S. government and is not subject to copyright
protection in the United States. It may be reproduced and distributed in
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separately.

A

United States Government Accountability Office Washington, D.C. 20548

October 12, 2004

Congressional Committees

In response to substantial Medicare overpayments for outpatient drugs,1
Congress enacted a revised payment formula in the Medicare Prescription
Drug, Improvement, and Modernization Act of 2003 (MMA) beginning January
1, 2005.2 For the limited number of drugs covered under part B of the
Medicare program,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.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,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.

1H.R. Conf. Rep. No. 108-391, at 582-84 (2003), reprinted in 2003
U.S.C.C.A.N. 1808, 1950-51.

2Pub. L. No. 108-173, S: 303, 117 Stat. 2066, 2233-55 (2003).

3Medicare part B provides coverage for certain physician, outpatient
hospital, laboratory, and other services to beneficiaries who pay monthly
premiums.

4A 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.

542 C.F.R. S: 424.57(b)(4) (2003).

MMA directed us to study the adequacy of Medicare's payment for inhalation
therapy.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

6Pub. L. No. 108-173, S: 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.

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.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)8 to one based primarily on the
average sales price (ASP)9 plus 6 percent. This new payment method is
expected to result in payment rates that are closer to drug acquisition

742 C.F.R. S: 424.57(c)(12) (2003).

8Often described as a "sticker price" or "list price," AWP is the average
price that a manufacturer suggests wholesalers charge pharmacies.

9ASP 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, S:
303(c), 117 Stat. 2066, 2240-41 (2003).

costs.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,11 while payment was 95
percent of AWP.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.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

10H.R. Conf. Rep. No. 108-391, at 582-84 (2003), reprinted in 2003
U.S.C.C.A.N. 1808, 1950-51.

11GAO, Medicare: Payments for Covered Outpatient Drugs Exceed Providers'
Cost, GAO01-1118 (Washington, D.C.: Sept. 21, 2001).

12In implementing MMA, CMS set payments for inhalation therapy drugs
furnished in 2004 at 80 to 85 percent of AWP.

13These services are not required by Medicare.

inhalation therapy drugs and an appropriate amount for such a dispensing
fee.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.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,

  1469 Fed. Reg. 47,488, 47,549 (2004). 1569 Fed. Reg. 47,488, 47,549 (2004).

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

    Suppliers Range of per unit average acquisition cost Ipratropium bromide

                            All (n=12) $0.23 -$0.64

                             Large (n=4) 0.26 -0.64

                             Small (n=8) 0.23 -0.46

                               Albuterol sulfatea

                            All (n=12) $0.04 -$0.08

                             Large (n=4) 0.04 -0.06

                             Small (n=8) 0.05 -0.08

Budesonideb

                            All (n=12) $0.04 -$4.35

                             Large (n=4) 0.04 -3.69

                             Small (n=8) 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.

aThese costs are for generic albuterol sulfate and do not include the
costs of Xopenex(R), a brand-name form of albuterol sulfate.

bBudesonide 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.

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

      Cost Category Range of per patient monthly costs Patient care costs

                            Pharmacy $0.10 -$123.73

                       Packaging and shipping 0.32 -32.61

                              Delivery 0.00 -17.39

            Medication refill and compliance phone calls 0.12 -17.64

                        Other patient carea 0.00 -24.04

                       Administrative and overhead costs

                        Billing/collection $2.00 -$9.68

           Rent/mortgage/lease/or other payment for space 0.26 -7.19

                              Insurance 0.00 -4.10

                            Depreciation 0.28 -3.88

                              Utilities 0.13 -3.67

                               Storage 0.00 -2.96

                              Licensing 0.06 -2.39

                              Training 0.00 -0.80

                               Taxes 0.00 -30.92

Bad debt 0.00 -9.28

Other administrative and overheadb 0.21 -29.84

Source: GAO analysis of data from 12 suppliers.

aOther patient care costs as reported by the suppliers in our sample
included customer service representatives not included in another cost
category and purchasing personnel.

bOther 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.

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,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.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).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.19 For example, suppliers
would bill

16Drug compounding is the process of mixing, combining, or altering
ingredients to create a customized medication for an individual patient.

1769 Fed. Reg. 47,488, 47,549 (2004).

18To 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.

19In contrast, administrative and overhead costs generally are not
dependent on the frequency with which the drugs are dispensed.

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 Range of costs

           Per patient 30-day costs with 30-day supply $6.96 -$203.75

          Per patient 90-day costs with 90-day supplya 12.61 - 267.91

Source: GAO analysis of data from 12 suppliers.

aTo 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.

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 	We recommend that the Administrator of CMS evaluate
the costs of dispensing inhalation therapy drugs and modify the dispensing
fee, if

Executive Action	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 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.

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

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.

Appendix I Scope and Methodology

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

Appendix I Scope and Methodology

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.

Appendix II

Comments From the Centers for Medicare & Medicaid Services

Appendix II Comments From the Centers for Medicare & Medicaid Services

Appendix II Comments From the Centers for Medicare & Medicaid Services

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