Chapter 20: Billing and Reimbursement

Learning Outcomes
Explain principles of billing & reimbursement
Define common pricing benchmarks
List various payers of pharmaceuticals &

pharmacy services
Describe differences in reimbursement
processes
Describe information needed for 3rd party
claim
Use knowledge to identify reason for rejected
claim

Key Terms
Adjudication average
Manufacturer price (AMP)
Average sales price (ASP)
Average wholesale price (AWP)
Coinsurance
Copayment
Cost sharing
Coverage gap

Key Terms
Deductible
Diagnosis related group (DRG)
Dispensing fee
Federal upper limit (FUL)
Fee for service
Formulary
Healthcare common procedure coding system

(HCPCS)

Key Terms
Indemnity
Institutional patient assistance programs

(IPAPs)
Maximum allowable cost (MAC)
Network
Patient assistance programs (PAPs)
Pharmacy benefit manager (PBM)
Premium
Prior authorization

Key Terms
Prospective payment
Quantity limits
Retrospective payment
Revenue
Step therapy
Third-party payer
Wholesale acquisition cost (WAC)

Pharmacy Accounting
Basics
Margin = Amount paid by patientacquisition cost
of drugs
Net Profit = Total revenue total expenses
Total revenue must exceed total expenses
Significant changes in reimbursement for drugs
affects pharmacy profits

Pharmacy technicians
knowledge of reimbursement is significant role

Reimbursement Basics
Based on many factors including:
practice setting
type of drug
who is paying for drugs

Prospective payment
all costs associated with treating condition
deliver drugs at or below predetermined rate

Retrospective, or fee for service

drugs are dispensed & later reimbursed
predetermined formula in contract between pharmacy

& 3rd party payer (insurance company or PBM)

3 Party Contract
Formula
Ingredient cost
rd

benchmark (several options in later slide)

Dispensing fee
covers costs of dispensing prescription
Copayment aka copay
cost-sharing amount paid by patient or customer

Pharmacy profit
Reimbursement > costs to dispense prescription
reimbursement= (ingredient cost + dispensing fee)

copayment

Cost Terms
Average wholesale price (AWP)
commonly used benchmark
created in 1960s
available from MediSpan & First Databank
Known as sticker price
AWP usually set at 2025% above wholesale

acquisition cost (WAC)

Cost Terms
Wholesale acquisition cost (WAC)
set by each manufacturer
list price manufacturer sells to wholesaler
Does not include discounts or price concessions
If AWP is basis for reimbursement, formula is

usually AWP less some percentage

If WAC is basis, formula is usually WAC plus
small percentage
Neither AWP nor WAC represent actual cost of
drugs

Cost Terms
New benchmarks
Average sales price (ASP)
based on manufacturer-reported selling price
data
includes volume discounts & price concessions
Average manufacturer price (AMP)
average price paid to manufacturers by

wholesalers
includes discounts & other price concessions

DRA
Budget Deficit Reduction Act of 2005 (DRA)
requires AMP to calculate federal upper limit for
drugs paid through Medicaid
FUL=funds from feds to state Medicaid programs
Patient Protection & Affordable Care Act of 2010
AMP was established as 175% of ASP
Reimbursement formula for generic product

different than for brand product

Brands reimbursed based on AWP or WAC

MAC
Maximum allowable cost
based on cost of lowest available generic
equivalent
Used by insurance companies & Medicaid
Presents challenge to pharmacies
not published
widely variable among insurance companies

Payment
2008 Stats:
private insurance paid for 42%
Medicare and Medicaid paid for 37%
consumers paid 21%
Cash price is usual & customary price
3rd party contracts may pay which ever price

is lower
contract formula price
usual & customary price

PAPs
Patient assistance programs (PAPs)
low-income patients who lack prescription drug
coverage and meet certain criteria
Criteria for PAPs are widely variable
determined by individual drug companies
mostly proprietary drugs in PAPs
patient is required to complete application

Drug company sends drug to licensed

pharmacist or physician on patients behalf

IPAPs
Institutional patient assistance programs
Medications are provided to institution
Institution verifies patient meets established

criteria
Pharmacies receive replacement product
Pharmacy technicians play important role

340B
340B drug pricing program covered entities:
federal qualified health centers (FQHCs)
disproportionate share hospitals (DSH)
state-owned AIDS drug assistance programs
Drastically reduced drug prices to eligible

patients
Administered by The Office of Pharmacy
Affairs
within Health Resources and Services

Administration

Private Insurance
Most common purchasers of private insurance
employers
labor unions
trust funds
professional associations
individuals

Private Insurance
Managed care (based on network of

providers)
lower cost than indemnity
must use network providers

Indemnity (non network- based coverage)

more expensive
more choices of physicians & hospitals

PBMs
Pharmacy Benefit Managers
administer pharmacy benefits for private or
public 3rd party payers
aka plan sponsors
Major PBMs
CVS Caremark
Medco
Express Scripts
Walgreens Health Initiatives
Wellpoint Pharmacy Management

PBMs
Sponsor pays PBM fee
Fee covers total cost of pharmacy benefit
PBM administers pharmacy benefit under
direction of sponsor
PBM manages benefit so cost of prescriptions
does not exceed amount of money paid to PBM
by sponsor
Formulary cornerstone of PBM activities
Preferred & nonpreferred
may charge different copays or copay tiers

PBMs
Prior authorization
requires prescriber to receive preapproval from
PBM
used for newer drugs
Step therapy
must try & fail on recognized first-line drug

before expensive second-line drug is covered

PBMs
Quantity limits
amount of drug or total days of therapy
physician or pharmacist may request an override
of any restrictions PBM places on therapy
Administering benefit is balancing act
managing costs
providing quality service & value

Mail order
90-day supply
reduced copayment

Specialty Services
High-cost drugs
newer biotechnology drugs
Includes
special delivery of medication to beneficiarys

home
free nursing visits to help train patient
24-hour hotline for beneficiary to call
pharmacist

PBMs provide complex & valuable service

Processing 3 Party
Scripts
Prescription drug benefit identification (ID)
rd

card
Necessary information to file claim on ID card:
BM (Any PBM) or drug benefit provider
telephone number for PBM customer service
employer
member name
member ID number
participants name
BIN # (000012) bank identification number

Processing 3rd Party Rx

Prescription & 3rd party info entered into

computer
PBM either accepts or rejects claim
codes standard across all prescription benefit plans
Missing or Invalid Patient ID
Prior authorization required
Pharmacy not contracted with plan on date of

service
Refill too soon
Missing or invalid quantity prescribed

Public Payers
Medicare is largest public payer
Medicaid
Department of Veterans Affairs
Department of Defense
Indian Health Service

Medicare Serves Cover:

Elderly
qualify for Medicare at 65 years of age

Disabled
People with end-stage renal disease (ESRD)
Amyotrophic lateral sclerosis (ALS)-Lou Gehrig

disease

4 Parts to Medicare:
Part A (hospital insurance)
Part B (medical insurance)
Part C (Medicare Advantage plans)
Part D (prescription drug coverage)

Medicare Part A
Part A (hospital insurance)
inpatient care (hospitals, skilled nursing facilities )
hospice care
home health care
pre-paid through payroll taxes
processed by fiscal intermediary
diagnosis-related group (DRG) is basis for
reimbursement
DRG=set rate paid for procedure based on cost &
intensity

Medicare Part B
Optional medical insurance
Covers:
outpatient physician & hospital services
clinical laboratory services
DMEPOS- acronym for:

durable medical equipment

prosthetics
orthotics
supplies

Medicare Part B
May cover medical services that Part A does not

cover
Requires active enrollment
Costs
monthly premium
annual deductible
coinsurance

Medicare Part B
Covers some preventative services &

specialty meds
pneumococcal vaccines
cancer screenings (cervical, breast, colorectal,

prostate)
immunosuppressive drugs
erythropoietin stimulating agents for home
dialysis patients
oral anticancer drugs
oral antiemetic drugs

Medicare Part B
Medicare Part B payment
does not always pay 100% for Part B covered
items
payment category determines amount Medicare
pays.
pays percentage of approved amount after
deductible has been met
patient pays remaining portion-known as
coinsurance (& premium, deductible)

Medicare Part B
Coinsurance may be submitted to secondary

insurer if patient has coverage

Part B claims are processed by local Medicare
carrier
DMEPOS items are processed by DME
Medicare administrative contractors (DME
MACs)
Claims must be filed within 1 year or
Medicare reduces allowed amount by 10% for

payable claims

Medicare Part C
Medicare Advantage Plan combines Part A & B
Benefits provided by Medicare-approved

private insurance companies

Often include prescription drug benefits
Medicare Advantage Prescription Drug plans

(MAPDs)

Therefore, Part C beneficiaries should not

enroll in Part D prescription drug plan

5 Types of Part C Plans

Health maintenance organizations (HMOs)
Preferred provider organizations (PPOs)
Medical savings account plans
Private fee-for-service plans
Medicare special needs plans

Costs of Medicare Part C

Beneficiaries pay
premiums
deductibles
copayments
coinsurance
Medicare Advantage Plans
charge 1 combined premium for Part A & B
benefits & prescription drug coverage (if
included in plan)

Medicare Part D
Federal prescription drug program paid for by
Centers for Medicare and Medicaid Services
(CMS)
individual premiums
Part of Medicare Prescription Drug,

Improvement, & Modernization Act of 2003

Voluntary insurance benefit
outpatient prescription drugs

Must enroll in Medicare Part D

Medicare Part D
Prescription drug plans administered by PBMs
Each plan varies in terms of cost & drugs

covered
4 enrollment & plan change opportunities:
beneficiary turns 65 & is eligible for Medicare
beneficiary receives Medicare as result of

disability
from November 15-December 31 of any year

open enrollment period

when beneficiary qualifies for Extra Help

Medicare Part D
Late enrollment penalty
monthly charge of 1% of national base beneficiary
premium (calculated by CMS) for every month that
beneficiary does not join Part D plan
Creditable coverage
coverage that is at least as good as Standard

Medicare Drug Benefit

can be from current or former employer, union,
Veterans Administration, Department of Defense,
or Federal Employees Health Benefits Program

Medicare Part D
Customers contact employee benefits

manager or CMS (1-800-MEDICARE or

www.medicare.gov) for questions about
joining Medicare Part D
Costs
monthly premium
annual deductible
either coinsurance or copayments for each

prescription

Medicare Part D Gap

Coverage gap- donut hole
No coverage period
occurs after initial coverage limit
must pay all costs for prescriptions

Catastrophic coverage threshold ends gap

Gap considered deductible in the middle

Medicare Part D
Beneficiaries receive notice in October
outlines how plan will change for following year
can keep plan or switch during open enrollment
Special populations can receive Extra Help
aka Low-income Subsidy
automatic enrollment if

already receive full Medicaid benefits

referred to as dual eligibles
Medical Savings Programs (MSP)
Supplemental Security Income (SSI)

Medicare Part D
Extra Help not used to capacity
>2 million people eligible but have not

applied
Drug formularies for Medicare Part D
vary from plan to plan
plans must cover at least 2 drugs in each

therapeutic category

Medicare Part D
Formularies
6 protected categories must include almost all
drugs
1.Antipsychotics
2.Antidepressants
3.Antiepileptics
4.Immunosuppressants
5.Cancer drugs
6.HIV/AIDS drugs

Medicare Part D
Formularies
Some classes not required to be covered by
Medicare Part D
over-the-counter drugs
benzodiazepines
barbiturates
drugs for weight loss or weight gain
drugs for erectile dysfunction

Medicaid plan may cover some drugs that are

not covered by Medicare Part D

Medicare Part D
Formularies
If Prior Authorization Required
Medicare Part D covers 1-time 30-day supply
allows time for physician to complete

paperwork necessary for prior authorization

If drug not on formulary

beneficiary/prescriber can request exception to
formulary
if not granted by Part D plan, beneficiary can
submit an appeal

Medicare Part D
Prescriptions
Similar to other 3 Party
rd

National Provider Identifier (NPI)

or non-NPI prescriber ID can be submitted
Prescription ID card from Part D plan
or pharmacy can submit an eligibility query

online
E1 transaction returns 4Rx data

RxBIN, RxPCN, RxGrp, RxID, 800 phone # of Part D

plan

Medicaid
Jointly funded by federal & state governments
wide variation in Medicaid coverage from state to
state
Covers 3 main groups of low-income Americans
parents & children
elderly
disabled

Federal poverty limits (FPL)

May qualify for Medicaid if medical expenses

exceed certain threshold = spend down

Dual Eligibles
Medicaid recipients who qualify for Medicare

are known as dual eligible

Medicare is usually considered primary payer
Medicaid can supplement Medicare benefits by

providing coverage for benefits not be covered by

Medicare
providing assistance with copayments for
prescriptions

Medicaid is safety net or payer of last resort

Medicaid
States must cover minimum set of Medicaid

benefits for eligible patients

Provide coverage for prescription drugs
prescribed by licensed physician
dispensed by licensed pharmacist
medication must be recorded on written

prescription
all prescriptions must be electronically prescribed
or written/printed on tamper resistant paper
need for med must be supported in medical record

Medicaid
Pharmacies sign contract with state Medicaid

agency
Obligates provider to accept payment Medicaid
provides as payment in full
Most prescriptions have low or zero copayments
Certain categories of eligible patients are
exempt from cost sharing
children
pregnant women
nursing home residents

Medicaid
By law, Medicaid recipients may not be

denied services based on their inability to pay

assigned cost sharing
When Medicaid patient is unable to pay for
copayments for prescription drugs, pharmacy
reimbursement is reduced

Other Public Payers

Department of Veterans Affairs
Department of Defense
Indian Health Service
All veterans of active military service (Army,

Navy, Air Force, Marines, and Coast Guard)

are potentially eligible for health benefits from
Department of Veterans Affairs (VA)
eligibility is not just for veterans who served in

active combat
beneficiaries usually pay copays

Other Public Payers

VA prescription benefit is considered

creditable
it is at least as good as Medicare Part D
can opt out of Medicare Part D & do not incur

late enrollment penalty as long as they

continue their VA pharmacy benefits

VA uses a national drug formulary

prescriptions & refills are available at VA
pharmacies or mail order facilities

Other Public Payers

TRICARE
health benefit program from Department of

Defense
Active military personnel, retirees, & their
families are eligible for TRICARE
TRICARE retail & mail-order prescription benefit
is administered by Express Scripts
based on national TRICARE formulary
prescription coverage is considered creditable
with Medicare Part D

Other Public Payers

The Indian Health Service (IHS)
provides comprehensive federal health care
delivery system
American Indian tribes
Alaska Native tribes

Billing for Drugs &

Services
Billing procedures for
inpatient hospital
outpatient hospitals, clinics, & physician offices
outpatient community settings

Each setting-different billing requirements &

reimbursement methods

Inpatient Hospital Setting

Primary Methods of payment
per diem
prospective payment
Drug costs included in DRG
DRG assigned when patient admitted
Steps to determine PPS payment on CMS

Website:
http://www.cms.hhs.gov/AcuteInpatientPPS

Inpatient Hospital Setting

Per diem & prospective payment
Drug costs are included in DRGs
Prospective payment system (PPS)
classifies hospital cases based primarily on
type of patient
diagnoses
procedures
complications
comorbidities
resources used

Outpatient Hospitals
&
Clinics
Drugs
may be part of procedure or paid
separately
Most drugs given in these settings are fee-forservice
fee-for-service formula is based on AWP

Medicare Part B hospital outpatient services

paid per
Outpatient Prospective Payment System (OPPS)

Some drugs are bundled into ambulatory

payment classification (APC)

APC
Ambulatory Payment Classification
Predetermined outpatient payment categories
similar to inpatient DRGs

Drugs with costs > $60 per administration

have separate APCs

payment=average sale price + 5%

5%)

< $60 are bundled into APC payment

(ASP +

HCPCS Codes
Health Care Common Procedure Coding

System code
Service units are pre-determined billing
increments that may be unrelated to package
size
infliximab (Remicade) injection

HCPCS code of J1745

billed & reimbursed in increments of 10 mg

HCPCS Codes
HCPCS federal coding system consists of 3

levels:
Level I-Current Procedural Terminology codes

(CPT)
Level II-National Alpha-Numeric codes (CMS)
standardized coding system
used to identify products, supplies, services not
included in CPT codes

Level III-Local Alpha-Numeric codes

local Medicare carriers

J-codes
HCPCS codes for drugs = J-codes
J-codes subset of Level II code set
Identify specific drugs
J-code refers to code that often begins with J
HCPCS drug codes may begin with other letters such
as C or Q
Codes beginning with C or Q are often temporary
codes

OPPS
Outpatient Prospective Payment System (OPPS)
based on pre-determined payment rates
HCPCS code is assigned an OPPS status indicator
identifies whether product or service is packaged
or separately payable
Medicare OPPS Addendum B
lists products HCPCS codes
status indicators
fees

Claim Submission-Key
Elements
Beneficiary name & Health Insurance Claim Number
Date of service
HCPCS codes
Common Procedural Terminology (CPT) codes
International Classification of Diseases codes
ICD-9 codes also known as Diagnosis codes

Clinical Modifiers
National Drug Code (NDC)
Units of Service (Quantity expressed in service units or

billing increments)
Place of service

Community Pharmacy
Setting
Drug claims adjudication process involves
these steps:
submitting appropriate information
determining eligibility, coverage, payment
communicating reimbursement
settling claim

National Council of Prescription Drug Programs

(NCPDP)
develops standards for information processing for

pharmacy services sector of health care industry

NCPDP System
Allows communication of claims between
pharmacy providers
pharmacy benefit managers
third-party payers
insurance carriers at point-of-service

Enables pharmacies to obtain immediate

response
verify eligibility
determine formulary coverage status
confirm quantity limits & copay amounts
submit claims
receive payment information

Prescription Processing
Key billing elements include:
Prescription Processor
BIN (bank identification number)
PCN (processor control number)
Pharmacy Provider Information
NPI (National Provider Identification)
NCPDP or NABP
Eligibility (specific to each patient)
Member Name & Identification Number
Group Number

Key Billing Elements

Relationship (Plan Member, Spouse, Dependent)
Prescription Information
Date of prescription (date was written and each fill)
NDC
Directions for use
Quantity dispensed
Days Supply
Dispense as Written (DAW) or Product Substitution
Physician Signature
NPI number
DEA number when required

Online Ajudication
Information
Eligibility information
Specific coverage (formulary vs. non-

formulary items)
Prompts for prior approval
Copayment amounts
Refill too soon
Exceeds quantity limits or days supply
Denials when item not covered

Audits by 3 Partys &

Payback
Following 3 party audit, pharmacies may have to pay
rd

rd

back
Pay backs caused by:
incorrect information

dates, drugs, strengths, or directions

incorrect days supply (# ordered & directions should match)

overbilled quantity (an amount > the

quantity written)

incomplete information

no quantity indicated
Use as directed sig not ok: must be able to calculate days supply

patient name & unique identifier

date of prescription

DAW Codes
0

No product selection
1 Physician DAW: substitution not allowed by provider
2 Patient DAW: substitution allowed; patient request
2 Pharmacist DAW Brand: substitution per RPh
3 Generic not in stock: substitution allowed
4 Brand sold at Generic Price: substitution allowed
5 Override
6 Brand Mandated by Law: substitution not allowed
7 Generic Not Available: substitution allowed
8 Other