Industry Insights

Pitfalls in Billing Pharmaceuticals to the Medicare Program

August 2012
Author:  Sally Hardgrove

Sally Hardgrove



Health Care

201 N. Illinois Street, Suite 700
P.O. Box 44998
Indianapolis, IN 46244-0998 (46204)


The 2012 Office of the Inspector General (OIG) Work Plan included a new audit item to review payments to hospitals for drugs, and administration of those drugs, provided to Medicare outpatients. Several Recovery Audit Contractors (RACs) have added new audit issues for separately payable drugs. This article offers a high-level overview of drug billing concerns related to hospital Medicare outpatient claims. Note that drugs provided in conjunction with End Stage Renal Disease (ESRD), home health services, Durable Medical Equipment (DME) and physician office visits have other billing nuances that are addressed in other places in the regulations.

Comprehensive Error Rate Testing (CERT) continues to identify errors in billing for drugs and associated administration procedures. During the summer of 2012, the OIG published results of studies of overpayments made by various fiscal intermediaries (FIs) to hospital providers. 

The scrutiny is proving lucrative; in late July, two OIG reports disclosed the findings of a review of claims for two Medicare Administrative Contractors (MACs) specific to billing units of Herceptin (generic name:  trastuzumab). The reports found overpayments in excess of $2.1 million across Jurisdictions 6 and 12 due to incorrect units of service and billing of drug waste for multiuse vials. Medicare provides limited coverage for pharmaceuticals under Part B; those coverage conditions are outlined in several places in the Medicare Benefit Policy, Claims Processing Manuals and other locations in the regulations.

The Part B prescription drug benefit generally falls into three categories:  drugs furnished incident to a physician’s service that meet the requirements for separate payment, drugs used as a supply to DME and certain statutorily covered drugs. All categories assume the drug is medically necessary, FDA-approved for the patient’s condition and given by a licensed medical provider.

An additional requirement for payment under Part B is that the drug usually cannot be self-administered. In general, Part B-covered drugs are given by infusion or injection, so, in most cases, oral medications are not covered under Part B.

The review and enforcement activities around the billing of drugs in the hospital outpatient setting are primarily:

  • Incorrect billing units
  • Billing drug waste without meeting the requirements
  • Billing self-administrable drugs

Incorrect Billing Units

The Medicare Claims Processing Manual states, “Hospitals should report charges for all drugs, biologicals, and radiopharmaceuticals, regardless of whether the items are paid separately or packaged, using the correct HCPCS codes for the items used.” This section instructs us to capture all pharmaceutical-related charges and bill them with the correct HCPCS code.

“It is also of great importance that hospitals billing for these products make certain that the reported units of service of the reported HCPCS code are consistent with the quantity of a drug, biological, or radiopharmaceutical that was used in the care of the patient,” the manual continues. Providers are instructed to bill the drug in multiples of the HCPCS code description, consistent with what was actually given to the patient. Adjusting billing units requires a mechanism to convert the units as dispensed by the pharmacy to HCPCS units for billing. Typically, there is a module or table in the billing system; if the billing system cannot make the conversion, the claim should be manually adjusted to comply with billing requirements.

One example of overpayment resulting from incorrect HCPCS assignment and units was mentioned in the July 12, 2012, OIG report on review of Medicare Payments processed in Jurisdiction 5 by Wisconsin Physicians Service Insurance Corporation (WPS). One provider incorrectly billed Medicare for 106 units of J0735 (clonidine hydrochloride, 1 mg) instead of 1 unit of HCPCS code J3490 (unclassified drugs, no unit specified). The provider was paid $230,987 when it should have received nothing. The provider refunded the incorrect payment. 

Billing Drug Waste

Compliance with wasted drugs billing requirements is under increased scrutiny. The Medicare Claims Processing Manual states that when a “physician, hospital or other provider or supplier must discard the remainder of a single-use vial or other single-use package after administering a dose/quantity of the drug or biological to a Medicare patient, the program provides payment for the amount of drug or biological discarded as well as the dose administered, up to the amount of the drug or biological as indicated on the vial or package label … Note:  Multiuse vials are not subject to payment for discarded amounts of drug or biological.”

The recovery around incorrect payments for Herceptin occurring around the country—by the OIG, the RACs and other enforcement agencies—relates to hospitals billing for full vials. Herceptin only comes in multiuse vials, so it is only subject to payment for the portions used. For those times when a single-use vial contains wasted drug, the hospital may bill for the discarded amount if documented properly.

Different FIs and MACs have issued instructions for proper documentation. In general, providers are instructed to document the amount wasted, in addition to the standard documentation required to support charges for the drug actually given to the patient. WPS published an article in March 2012 stating, “Drug wastage or discard must be documented in the patient’s medical record with date, time, amount wasted and reason for wastage. Upon review, any discrepancy between amount administered to the patient and amount billed may be denied as nonrendered unless the wastage is clearly and acceptably documented. The amount billed as ‘wasted’ must not be administered to another patient or billed again to Medicare.”  

Self-Administrable Drugs

Differentiating between billable and self-administrable drugs (SADs) has been a long-standing challenge for providers. One of the requirements for drug coverage under Part B for Medicare outpatients is that the drug not be usually self-administrable by the patient. Method of administration usually is the key in determining whether an item is self-administrable; Medicare generally considers all intravenous and intramuscular injections not to be self-administered, but there always are exceptions. Medicare requires each MAC and FI to annually publish a list of the injectable drugs subject to the self-administered coverage exclusion on their websites, including the data and rationale that led to the determination. 

If a drug is considered self-administrable, it is not a covered benefit and cannot be billed to the Medicare program as a covered charge. Instead, these drugs are to be flagged as noncovered and billed with revenue code 0637 (self-administrable drugs). This will flag the charge as noncovered for both Payment Prospective System and critical access hospital providers. The charge then becomes a patient responsibility. Because it is noncovered by statute, it is not necessary to obtain an advanced beneficiary notice before the provider bills the patient. 

Some self-administrable drugs are so integral to an associated procedure that Medicare allows these items to be billed as supplies. Identifying items that meet these criteria has been problematic. The Medicare Benefit Policy Manual has been updated with more guidance for providers. Chapter 15, Section 50.2M was added, including additional examples of when drugs are treated as supplies and should be billed as such. Because payment for these drugs as supplies is included in the procedure, the hospital cannot flag them as noncovered and bill the patient.

Some tactical challenges in compliance with the self-administrable billing exceptions include:  identifying the drugs, assigning revenue code 0637 for outpatient Medicare patients while retaining 0250 for inpatient bills, billing the patient for the drugs so the patient could then bill Part D and identifying those items integral to a procedure so they can be set up as supply items on the Chargemaster (CDM).

Risk Mitigation

It is clear there are multiple pitfalls for the compliant billing of pharmaceuticals to Medicare Part B. Hospitals need to ensure, to the extent possible, that their pharmacy CDM is accurate with correct HCPCS and revenue codes, that unit conversion modules or tables are set up correctly, that self-administrable drugs have been identified as such and revenue code fields are set to toggle between 637 and 250 based on bill type. Noncovered drugs should be billed to the patient, not Medicare. Drugs integral to the procedure should be set up as supply items, not billed as noncovered. Nursing documentation, including that on an electronic medication administration record, should indicate date, time and nurse responsible for administration and the amount of drug given—and wasted—if any. Only wasted drugs in single-dose vials can be billed to the program and only if documentation in the medical record meets the requirements. 

If you have additional questions, contact your BKD advisor.

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