INTRODUCTION

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 Coverage of Enteral Nutrition Therapy 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.1 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.

Enteral nutrition formulas are available in liquid or powder form (which is reconstituted with water). The liquid solution is administered through a tube, which is threaded through the patient’s nose or a surgical opening that leads directly to the stomach or intestine. Liquid enteral nutrition formulas are packaged in cans and pre-filled sterile containers. A canned formula is emptied into a plastic bag or container, which is then connected to tubing and hung from an IV pole for administration. Unlike cans, the pre-filled sterile systems do not require transfer of formula from one container to another. A pre-filled container is “spiked” with tubing and then hung from an IV pole for administration.

Medicare groups enteral nutrition formula products into seven classes, based on their composition. Products falling within these classes are identified by one of seven Healthcare Common Procedure Codes (HCPCs) for reimbursement purposes. A wide variety of enteral nutrition formulas are grouped under Category I, including Boost®, Ensure®, Isosource®, and Nutren®. However, Medicare carriers do not collect any information on the manufacturer, brand name, type, and size of packaging of the individual enteral nutrition formulas that they cover under the Category I procedure code.

Medicare Part B Payments for Enteral Nutrition Formulas
Medicare Part B payments for enteral nutrition formulas totaled more than $311 million in 2001. Category I enteral nutrition formulas represented by code B4150 (defined in Table 1) accounted for $201 million, or almost two-thirds, of total formula allowances. Code B4150 ranked ninth in a listing of durable medical equipment and supply codes with the highest Medicare allowances in the last quarter of 2001.2

Part B claims for enteral nutrition formulas are processed and paid by four durable medical equipment regional carriers (DMERCs). Medicare carriers use national fee schedule amounts to reimburse claims for enteral nutrition formulas.

Medicare reimbursement for enteral nutrition formulas is based on the number of calories of formula provided to a patient, not the volume of the product. Reimbursement amounts are for one unit, defined as 100 calories, of formula. For example, if a patient is prescribed 1,000 calories of formula per day, Medicare reimbursement is based on 10 units of formula per day. Medicare reimbursement for Category I formulas was $0.61 per unit in 2001.

Efforts to Reduce Medicare Payments for Enteral Nutrition Formulas
In 1998, DMERCs proposed a 16 percent reduction in Medicare’s allowance for Category I formulas using the Centers for Medicare & Medicaid Services’s (CMS’s) revised inherent reasonableness authority. This authority allowed DMERCs to adjust Medicare payments up or down by a maximum of 15 percent per year for medical equipment and supplies without going through a formal rulemaking process. An incremental approach would have resulted in a 15 percent reduction in the first year of implementation and an additional 1 percent reduction in the second year. The proposed reductions were based on DMERCs’ surveys of retail prices for items “that they suspected had excessive Medicare payment rates,”3 including Category I formulas. 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. This provision required the U.S. General Accounting Office (GAO) to complete a study of the potential effects of using inherent reasonableness measures, and required CMS to issue a final rule that responded to the GAO report before CMS could use this authority to reduce Medicare payments.

The GAO report (issued in July 2000) indicated that Medicare allowances for some items of durable medical equipment may be substantially higher than the prices available in retail outlets. However, GAO questioned the DMERCs’ retail survey results for enteral nutrition formulas, noting, “the DMERCs did not survey the types of enteral nutrition formulas and the packaging systems considered most appropriate and generally used for tube feeding.”4 GAO concluded that retail survey data alone did not provide sufficient evidence to adjust the Medicare allowance amount for Category I formulas. CMS published an interim final rule on the use of inherent reasonableness authority in December 2002. This rule, which became effective in February 2003, limits payment adjustments to a 15 percent increase or decrease in any given year and also states that proposed payment adjustments of less than 15 percent do not provide "a sufficient basis" for the use of this inherent reasonableness authority.

Enteral nutrition formulas and associated equipment and supplies were also included in the first round of a CMS competitive bidding demonstration in Polk County, Florida from October 1999 through September 2001. This project aimed to demonstrate how competition among suppliers could reduce Medicare payments for some medical equipment and supplies. Competitive bidding demonstration allowances for six of the seven enteral formula HCPCs were an average of 9.1 percent lower than fee schedule rates. The demonstration allowance for Category I formulas was $0.56 – an amount that is 8.2 percent lower than the national fee schedule amount.

Medicare Prescription Drug, Improvement, and Modernization Act of 2003
Since completion of our evaluation, the Medicare Prescription Drug, Improvement, and Modernization Act of 2003 (the Act) was signed into law (Public Law 108-173). In part, the Act directs the Secretary of the Department of Health and Human Services (HHS) to establish a program for competitive acquisition of durable medical equipment and supplies. This program, which will be phased in beginning in 2007, will replace fee schedules for covered items. The HHS Secretary is authorized to exempt items and services where competitive acquisition would not likely result in significant savings. Because this program has yet to be developed and implemented, it is premature to speculate about its impact on reimbursement for enteral nutrition and supplies; however, it bears noting that competitive acquisition could reform how Medicare reimburses for enteral nutrition, equipment, and supplies.

Supplier Acquisition Costs for Enteral Nutrition Formulas
Suppliers may purchase enteral nutrition formulas from sources such as wholesalers, group purchasing organizations, and directly from manufacturers. Wholesalers purchase large quantities of medical equipment and supplies at discounted rates from manufacturers and sell these products to suppliers. A group purchasing organization uses the combined buying power of its members to negotiate advantageous prices for medical equipment and supplies from manufacturers. Members of the group purchasing organization then purchase the products they need from the manufacturers or from wholesalers that accept the negotiated prices. Suppliers may also obtain enteral nutrition formulas directly from manufacturers. Prices charged to individual suppliers are often based on the volume of the product purchased.

METHODOLOGY

Sources of Contract Prices for Enteral Nutrition Formulas
We obtained contract prices for Category I enteral nutrition formula products offered through a national wholesaler and a group purchasing organization. These contracts were with four enteral nutrition formula manufacturers – Mead Johnson, Nestlé, Novartis, and Ross. The wholesaler is one of the largest distributors of medical and surgical products in the United States and serves more than 85,000 customers. The group purchasing organization serves over 2,300 non-hospital health care providers across the Nation. We also obtained information on one supplier’s contract prices that the supplier negotiated directly with two enteral formula manufacturers – Novartis and Ross.

The contracts included prices for many different types of enteral nutrition formulas, including liquid formulas packaged in 250 milliliter (mL) and 1000 mL cans, 1000 mL and 1500 mL pre-filled containers, and 237 mL Tetra Brik Paks®. Contracts also included prices for powdered formulas packaged in 1-pound and 4.5-pound cans.

Comparing Contract Prices to Medicare Payment Amount
The 177 individual contract prices reviewed were listed as “per case” or “per unit” prices. Medicare’s reimbursement amount for Category I enteral nutrition products is for 100 calories of formula. As shown in the example in Table 2 below, in order to compare contract prices to Medicare’s reimbursement amount, we converted each contract price into a price per 100 calories of formula. We researched manufacturer literature for each enteral nutrition formula product to determine the number of calories in a case or unit of product. We determined the price per calorie by dividing the contract price of the case or unit of product by the number of calories in the case or unit. We multiplied the product’s price per calorie by 100 to determine the contract price per 100 calories.

Calculating Potential Medicare Savings
We calculated how much Medicare and its beneficiaries would save if the reimbursement amount for Category I formulas were set at the median of purchase prices reviewed. We determined the percentage difference in prices for each source by subtracting the median of contract prices for Category I formulas from Medicare’s national reimbursement amount in 2001 ($0.61) and then dividing this number by Medicare’s reimbursement amount. We multiplied these percentage differences by total Medicare Part B payments for Category I formulas in 2001 in order to compute potential program savings. Medicare allowance data were obtained from CMS’s National Claims History File. The data used to calculate potential Medicare and beneficiary savings are presented in Appendix A.

Limitations of Contract Price Data
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. The estimates of potential program savings presented in the findings of this report would be lower if median contract prices had included associated supplier costs.

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