EXECUTIVE SUMMARY

OBJECTIVE

This inspection compared the amount Medicare reimburses for Category I enteral nutrition formulas (procedure code B4150) to prices available to the supplier community.

BACKGROUND

Medicare covers enteral nutrition therapy, commonly called tube feeding, for beneficiaries who cannot swallow due to a permanent medical problem or an impairment of long and indefinite duration. Medicare Part B coverage of enteral nutrition therapy is provided under the prosthetic device benefit for beneficiaries residing at home, or in a nursing facility when the stay is not covered by Medicare Part A. Medicare Part B payments for enteral nutrition formulas totaled more than $311 million in calendar year 2001.

Medicare groups enteral nutrition formula products into seven codes, based on their composition. Category I formulas represented by code B4150 accounted for $201 million of the $311 million in Medicare Part B payments for all enteral nutrition formulas in 2001. Medicare reimbursement for Category I formulas was $0.61 per 100 calories of formula in 2001.

While a wide variety of enteral nutrition formulas meets the criteria for inclusion in Category I, Medicare does not collect any information on the brands and types of formulas that are actually provided to Medicare beneficiaries when suppliers submit Category I formula claims for reimbursement.

Suppliers may purchase enteral nutrition formulas from sources such as wholesalers, group purchasing organizations, and directly from manufacturers. Prices charged to individual suppliers are often based on the volume of product purchased. In order to compare Medicare’s reimbursement amount to prices available to suppliers, we obtained contract prices for Category I enteral nutrition formulas through one national wholesaler and through one group purchasing organization. We also obtained information on one supplier’s contract prices that were negotiated directly with two enteral nutrition formula manufacturers.

We did not collect data from suppliers regarding any additional supplier costs related to furnishing enteral nutrition formula to Medicare beneficiaries. Therefore, the median contract prices do not include these associated supplier costs.

To determine how much Medicare and its beneficiaries could save if the reimbursement amount for Category I formulas were set at prices available to suppliers, we calculated percentage differences between the medians of contract prices for Category I formulas and the Medicare reimbursement amount in 2001. We applied these percentage differences to 2001 Medicare Part B payments for Category I formulas in order to compute potential program savings.

Since completion of our evaluation, the Medicare Prescription Drug, Improvement, and Modernization Act of 2003 (the Act) was signed into law. In part, the Act directs the Secretary of the Department of Health and Human Services to establish a program for competitive acquisition of durable medical equipment and supplies. This program has yet to be developed and implemented; however, it could reform how Medicare reimburses for enteral nutrition, equipment and supplies.

FINDINGS

Medicare’s reimbursement amount for Category I enteral nutrition formulas exceeded the median of purchase prices reviewed by as much as 115 percent. An analysis of 177 contract prices available to suppliers from the 3 sources reviewed indicated that the Medicare payment amount for Category I formulas exceeded median contract prices by 70 to 115 percent. The lowest median contract price for Category I formulas was obtained by the supplier who negotiated prices directly with manufacturers. If Medicare’s payment amount for these formulas had been set at the median of purchase prices reviewed, we estimate that the program and its beneficiaries could have saved over $82 million in calendar year 2001.

Individual contract prices for Category I formulas varied widely, from a low of $0.18 per unit to a high of $0.86 per unit. The majority (75 percent) of individual contract prices were lower than $0.42 per unit. At present, Medicare is unable to determine whether most beneficiaries are using the lower-priced or higher-priced products because the program does not collect any specific information on the products that are provided to beneficiaries when suppliers submit claims for Category I formulas.

RECOMMENDATION

The findings of this report suggest that the supplier community obtains Category I enteral nutrition formula products at prices that are lower than Medicare’s reimbursement amount. If Medicare’s reimbursement amount had been based more closely on these prices, the program and its beneficiaries could have realized savings.

The Centers for Medicare & Medicaid Services (CMS) had attempted to reduce Medicare payments for enteral nutrition formulas through the use of its inherent reasonableness authority. However, Congress suspended the use of the inherent reasonableness authority in the 1999 Medicare, Medicaid, and SCHIP Balanced Budget Refinement Act before payment reductions could be implemented. In December 2002, CMS published an interim final rule on the use of inherent reasonableness authority. This rule, which became effective in February 2003, allows CMS contractors to raise or lower Medicare payment amounts for medical equipment and supplies by 15 percent in any given year without a formal rulemaking process.

We believe that continued CMS attention to Medicare Part B payments for Category I enteral nutrition formulas is warranted. Since CMS now has the authority to implement inherent reasonableness reductions, we recommend that CMS:

Consider using its inherent reasonableness authority to reduce the Medicare reimbursement amount for Category I enteral nutrition formulas.

CMS may want to begin an inherent reasonableness review by collecting information from Medicare suppliers to identify the specific Category I enteral nutrition formulas that suppliers provide to Medicare beneficiaries. CMS may also want to collect information from suppliers to determine suppliers’ purchase costs for the specific formulas used by Medicare beneficiaries.

CMS agreed with our recommendation that they consider using inherent reasonableness authority to reduce the reimbursement amount for Category I formulas. CMS noted that it will not be able to initiate inherent reasonableness reviews until its contractor develops written procedures for conducting these reviews according to the statute and regulation.

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