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Testimony: 

Before the Committee on Oversight and Government Reform, House of 
Representatives: 

United States Government Accountability Office: 

GAO: 

For Release on Delivery Expected at 10:00 a.m. EST: 

Friday, February 9, 2007: 

Prescription Drugs: 

Oversight of Drug Pricing in Federal Programs: 

Statement of John E. Dicken: 
Director, Health Care: 

GAO-07-481T: 

GAO Highlights: 

Highlights of GAO-07-481T, a testimony before the Committee on 
Oversight and Government Reform, House of Representatives 

Why GAO Did This Study: 

Several federal programs help pay for or reduce the costs of 
prescription drugs for eligible individuals and entities. Three 
examples are the Medicaid drug rebate program, part of the joint 
federal-state Medicaid program that finances medical services for 
certain low-income people; the 340B drug pricing program, which 
provides discounted drug prices to certain eligible entities such as 
community health centers; and the Medicare Part D program, which 
provides a Medicare drug benefit for the elderly and certain disabled 
people. The price information drug manufacturers report under these 
federal programs affects related federal spending. Spending is also 
affected by the extent to which federal oversight ensures the accuracy 
of this information. 

GAO was asked to provide information related to the oversight of 
prescription drug pricing practices that affect these federal programs. 
This testimony focuses on the oversight of drug pricing related to the 
three programs and the implications for future congressional oversight. 
This testimony is based on recent GAO reports examining these programs 
and related work by the Department of Health and Human Services Office 
of Inspector General and others. 

What GAO Found: 

Regarding the Medicaid drug rebate program, GAO and others have 
reported inadequacies in the Centers for Medicare & Medicaid Services’ 
(CMS) oversight of the prices manufacturers report to CMS to determine 
the statutorily required rebates owed to states. For example, GAO and 
others have reported a lack of clarity in CMS’s guidance to 
manufacturers for calculating these prices. Several recent legal 
settlements under which manufacturers agreed to pay hundreds of 
millions of dollars to states because they were alleged to report 
inaccurate prices to CMS highlight the potential for abuse under the 
program. CMS recently issued a proposed rule intended to provide more 
clarity to manufacturers in determining the prices they report. 

GAO and others have reported inadequacies in the Health Resources and 
Services Administration’s (HRSA) oversight of the 340B drug pricing 
program and problems related to the lack of transparency in the maximum 
prices, called 340B prices, charged to eligible entities. GAO reported 
that HRSA did not routinely compare the prices actually paid by certain 
eligible entities with the 340B prices and that many of these eligible 
entities paid prices higher than the 340B prices. Because these prices 
are not disclosed to the entities, the entities are unable to determine 
whether the prices they pay are at or below these prices. In addition, 
because 340B prices are based on information reported by drug 
manufacturers for the Medicaid drug rebate program, inaccuracies under 
that program affect these prices. HRSA has made changes to its 
oversight of the program intended to address some of these concerns. 

The Medicare Part D program shares in common with other federal 
programs certain features that led to federal agency oversight 
challenges. For example, Part D relies on multiple private 
organizations to report to CMS certain price concessions from 
manufacturers, similar to the Medicaid drug rebate program. Also, Part 
D relies on CMS’s oversight to ensure that price information reported 
to it by private organizations are accurate, similar to the Medicaid 
drug rebate and 340B drug pricing programs. Other features of Part D, 
such as its reliance on contracts with private insurers to provide drug 
coverage to beneficiaries through a complex set of relationships and 
transactions with private entities, also suggest potential oversight 
challenges. 

Oversight inadequacies, inaccurate prices, lack of price transparency, 
and the potential for abuse suggest areas the Committee may wish to 
consider as it develops its oversight agenda. The Committee may wish to 
consider the extent to which CMS and HRSA will systematically take 
steps to ensure the accuracy of prices reported and charged by private 
organizations that participate in federal programs. The Committee may 
also wish to consider the extent to which federal agencies will 
effectively monitor for and detect abuses in the reporting of drug 
price information that affect these three federal programs. 

[Hyperlink, http://www.gao.gov/cgi-bin/getrpt?GAO-07-481T]. 

To view the full product, including the scope and methodology, click on 
the link above. For more information, contact John Dicken at (202) 512-
7119 or dickenj@gao.gov. 

[End of section] 

Mr. Chairman and Members of the Committee: 

I am pleased to be here today as you examine prescription drug pricing 
practices that affect federal programs that help pay for or reduce the 
cost of prescription drugs, and the implications for future 
congressional oversight of the programs. Spending on prescription drugs 
in this country has risen by about 11 percent on average each year from 
1998 through 2005 at retail outlets, faster than the average 7 percent 
yearly rate of increase in total U.S. health expenditures for health 
care services and supplies during the same period. Retail spending on 
prescription drugs from all sources in 2005 totaled about $201 billion, 
of which the federal government spent about $33 billion under various 
programs.[Footnote 1] The federal spending amount precedes the 2006 
introduction of the Medicare prescription drug benefit, known as 
Medicare Part D, which increased federal spending on prescription 
drugs.[Footnote 2] The amount the federal government spends for 
prescription drugs is related in part to the price information drug 
manufacturers report to federal programs. In addition, federal 
oversight designed to ensure the accuracy of that price information is 
an important part of the effort to control federal spending. 

To assist this committee as it develops its oversight agenda, you asked 
us for information pertaining to federal agency oversight of 
prescription drug pricing practices that affect the Medicaid drug 
rebate program, the 340B drug pricing program,[Footnote 3] and the 
Medicare Part D program. Accordingly, my testimony today will focus on 
the oversight of drug pricing related to these three federal programs 
and the potential implications for future congressional oversight. My 
remarks today are based primarily on our 2005 and 2006 reports 
examining federal programs that help pay for or reduce the cost of 
prescription drugs, which were done in accordance with generally 
accepted government auditing standards.[Footnote 4] I will also refer 
to related work by the Department of Health and Human Services Office 
of Inspector General (OIG) and others. 

In summary, oversight inadequacies by federal agencies and a lack of 
transparency in drug pricing practices that affect federal programs 
have important implications for federal spending on prescription drugs. 
Regarding the Medicaid drug rebate program, we and others have reported 
inadequacies in the Centers for Medicare & Medicaid Services' (CMS) 
oversight of the price information reported by manufacturers to 
determine the rebates owed to states, including a lack of clarity in 
CMS's guidance to manufacturers for calculating that price information. 
Recent litigation involving allegations that drug manufacturers 
reported inaccurate prices to CMS resulted in several manufacturers 
agreeing to pay about $88 million, $257 million, and $345 million to 
states, thus highlighting the potential for abuse under the program. 
CMS recently issued a proposed rule intended to provide more clarity to 
manufacturers in determining the prices they report to CMS. 

We and others have also reported inadequacies in the Health Resources 
and Services Administration's (HRSA) oversight of the 340B drug pricing 
program, a lack of transparency in the 340B prices, and overpayments to 
drug manufacturers. We reported in 2006 that HRSA did not routinely 
compare the prices actually paid by eligible entities with the 340B 
prices and that many entities we reviewed paid prices for drugs that 
were higher than the 340B prices. Because 340B prices are not disclosed 
to the eligible entities, the entities are unable to determine whether 
the prices they pay are at or below the 340B prices. In addition, 
because 340B prices are based on information reported by drug 
manufacturers for the Medicaid drug rebate program, inaccuracies in 
that information may affect 340B prices. HRSA has made changes to its 
oversight of the 340B drug pricing program that are intended to address 
some of these concerns. 

The Medicare Part D program shares in common with other federal 
programs certain features that led to federal agency oversight 
challenges related to the reporting of inaccurate price information in 
those programs. For example, the Medicare Part D program relies on 
private organizations that sponsor drug plans to calculate and report 
price information to CMS, much like the Medicaid drug rebate program 
relies on drug manufacturers to calculate and report drug pricing and 
price concession information to CMS. Also, the Medicare Part D program 
relies on CMS's oversight to ensure that price information reported to 
it by private organizations is accurate, similar to the Medicaid drug 
rebate and 340B pricing programs. Other features of the Medicare Part D 
program, such as its reliance on contracts with multiple private 
insurers to provide drug coverage to beneficiaries through a complex 
set of relationships and transactions with private entities, also 
suggest areas of potential oversight vulnerability. 

Although actions taken by both CMS and HRSA may address some of the 
oversight inadequacies we and others have reported, it is too soon to 
know how effective these actions have been in improving program 
oversight. Thus concerns about oversight inadequacies, inaccurate price 
information, lack of price transparency, and the potential for abuse 
associated with federal programs that help pay for or reduce the cost 
of prescription drugs suggest areas the Committee may wish to consider 
as it develops its oversight agenda. For example, the Committee may 
wish to consider the extent to which CMS and HRSA will take steps to 
systematically ensure the accuracy of price information reported by 
private sector organizations that participate in federal programs, and 
the extent to which cognizant federal agencies will effectively monitor 
for and detect abuses in the reporting of drug price information that 
affects the Medicaid drug rebate, the 340B drug pricing, and the 
Medicare Part D programs. 

Background: 

The Medicaid drug rebate program, the 340B drug pricing program, and 
the Medicare Part D program help pay for or reduce the costs of 
prescription drugs for eligible individuals and entities. 

The Medicaid Drug Rebate Program: 

Medicaid is the joint federal-state program that finances medical 
services for certain low-income adults and children. CMS, an agency of 
the Department of Health And Human Services (HHS), administers and 
oversees the program. While some benefits are federally required, 
outpatient prescription drug coverage is an optional benefit that all 
states have elected to offer. State Medicaid programs, though varying 
in design, cover both brand and generic drugs. Retail pharmacies 
distribute drugs to Medicaid beneficiaries, then receive reimbursements 
from states for the acquisition cost of the drug and a dispensing fee. 
In 2004, Medicaid outpatient prescription drug spending reached $31 
billion, of which $19 billion was paid by the federal government. 

To help control Medicaid drug spending, federal law requires 
manufacturers to pay rebates to states as a condition for the federal 
contribution toward covered outpatient prescription drugs.[Footnote 5] 
Rebates manufacturers must pay states for brand drugs under the 
Medicaid drug rebate program are based on two prices that drug 
manufacturers must report to CMS: the average manufacturer price (AMP) 
(the average price paid to a manufacturer by wholesalers for drugs 
distributed to the retail pharmacy class of trade) and best price (the 
lowest price available from the manufacturer to any purchaser with 
certain exceptions).[Footnote 6] Both amounts are to reflect certain 
financial concessions that are available to drug purchasers. The 
statute governing the program and the standard rebate agreement that 
CMS signs with each manufacturer define AMP and best price and specify 
how these prices are to be used to determine the rebates due to states. 
CMS provides additional guidance to manufacturers regarding the 
calculation of these amounts. After manufacturers report the required 
price information to CMS, CMS uses it to calculate the rebate due for 
each unit of a brand drug and reports this to the states. The state 
Medicaid programs use the information to determine the amount of 
rebates to which they are entitled from the manufacturers based on the 
volume of drugs paid for by the programs. 

The 340B Drug Pricing Program: 

The 340B drug pricing program[Footnote 7] gives more than 12,000 
eligible entities of various types--community health centers, 
disproportionate share hospitals, and AIDS Drug Assistance Programs 
(ADAP)[Footnote 8] among them--access to discounted drug prices, called 
340B prices. To access these prices, entities must enroll in the 
program, which is administered by HRSA. Drug manufacturers must offer 
covered drugs to enrolled entities at or below 340B prices in order to 
have their drugs covered by Medicaid.[Footnote 9] Enrolled entities may 
generally purchase drugs in two ways. They may choose the direct 
purchase option to receive the 340B prices up front, or they may choose 
the rebate option, typically purchasing drugs through a vendor and 
later receiving a rebate from the manufacturer covering any amount they 
paid above the 340B prices. Enrolled entities spent an estimated $3.4 
billion on drugs in 2003. 

To determine the 340B prices, HRSA uses a statutory formula that relies 
on AMP and Medicaid rebate data that it receives from CMS.[Footnote 10] 
Manufacturers separately calculate the 340B prices for their drugs 
using the statutory formula, and use these calculations as the basis 
for the prices they charge eligible entities. HRSA does not share the 
340B prices with the eligible entities due to the statutory provisions 
regarding the confidentiality of information used to determine 
them.[Footnote 11] 

The Medicare Part D Program: 

The Medicare Prescription Drug, Improvement, and Modernization Act of 
2003 (MMA) created a voluntary outpatient prescription drug benefit 
effective January 1, 2006, as Part D of the Medicare program.[Footnote 
12] Under Part D, Medicare beneficiaries may choose a prescription drug 
plan (PDP) from multiple competing PDPs offered by private 
organizations, often private insurers, that sponsor the plans. PDP 
sponsors enter into contracts with CMS, the agency that administers 
Medicare. PDPs may differ in the drugs they cover, the pharmacies they 
use, and the prices they negotiate with drug manufacturers and 
pharmacies. PDP sponsors may use pharmacy benefit managers (PBM) to 
negotiate with drug manufacturers and retail pharmacies for the prices 
of the drugs that each PDP covers.[Footnote 13],[Footnote 14] PDP 
sponsors are required to report to CMS the price concessions they 
negotiate; these price concession include discounts, rebates, direct or 
indirect subsidies, and direct or indirect remunerations. 

Oversight Inadequacies in the Medicaid Drug Rebate Program Raise 
Concerns about the Accuracy of Rebates Paid to States: 

We and others have reported inadequacies in CMS's oversight of the 
price information reported by manufacturers under the Medicaid drug 
rebate program, including a lack of clarity in CMS's guidance to the 
manufacturers for calculating prices. We reported in 2005 that CMS 
conducted only limited checks for errors in manufacturer-reported drug 
prices and that it did not generally review the methods and underlying 
assumptions that manufacturers use to determine AMP and best 
prices.[Footnote 15] We also noted in that report that OIG found that 
CMS did not provide clear program guidance for manufacturers to follow 
when determining those prices--for example, how to treat sales to 
certain health maintenance organizations (HMO) and PBMs.[Footnote 16] 
OIG stated that its review efforts were hampered by unclear CMS 
guidance on how manufacturers were to determine AMP, a lack of 
manufacturer documentation, or both. Our review also examined the 
pricing methodologies of several large drug manufacturers and found 
considerable variation in the methods they used to determine AMP and 
best price, and some of these differences could have affected the 
accuracy of these prices and thereby reduced or increased rebates to 
state Medicaid programs. OIG similarly identified problems with 
manufacturers' price determination methods and their reported prices in 
four reports issued from 1992 to 2001.[Footnote 17] 

Recent litigation has highlighted the importance of the accuracy of 
prices manufacturers report to CMS and the rebates they pay to states. 
For example, two drug manufacturers agreed to pay about $88 million and 
$257 million, respectively, to states in 2003 to settle allegations 
that they failed to include in their best price determinations certain 
sales to an HMO.[Footnote 18] Another manufacturer agreed to pay $345 
million to states in 2004 to settle several allegations, including that 
it did not account for drug discounts provided to two health care 
providers, resulting in an overstated best price for one of its top- 
selling drugs and reduced state rebates.[Footnote 19] 

CMS issued a proposed rule in December 2006[Footnote 20] to, among 
other things, implement provisions of the Deficit Reduction Act of 
2005[Footnote 21] (DRA) related to prescription drugs under the 
Medicaid program. This rule is intended to provide more clarity to 
manufacturers in determining AMPs reported to CMS, by indicating which 
sales, discounts, rebates, and price concessions are to be included or 
excluded. For example, it specifies that sales to PBMs and mail-order 
pharmacies must be included in AMP. The proposed rule also specifies 
that best price must include sales to all purchasers, including HMOs, 
that are not explicitly excluded and specifies the prices that must be 
included or excluded from those sales. Recognizing the evolving 
marketplace for the sale of prescription drugs, the proposed rule 
states that CMS plans to issue future clarifications of AMP and best 
price in an expeditious manner. In its notice of proposed rulemaking, 
CMS also referred to the DRA requirement that CMS disclose AMP data to 
states and post these data on a public Web site. AMP data are currently 
not made public. The changes represented by this proposed rule would 
likely affect the prices that manufacturers report to the federal 
government. Only after these regulations are finalized and implemented 
will there be an opportunity to assess the extent to which they improve 
the accuracy of prices reported and rebates paid by manufacturers. 

Oversight Inadequacies and Lack of Transparency in the 340B Drug 
Pricing Program Raise Concerns about Overpayments to Drug 
Manufacturers: 

We and others have reported inadequacies in HRSA's oversight of the 
340B drug pricing program, problems related to the lack of transparency 
in the 340B prices, and overpayments to drug manufacturers. OIG 
recently reported that some of the 340B prices that HRSA calculated 
were inaccurate and that HRSA did not systematically compare the 340B 
prices with those that were separately calculated by drug manufacturers 
for consistency.[Footnote 22] In addition, we recently reported that 
HRSA did not routinely compare 340B prices with prices paid by certain 
eligible entities. We and OIG both found that many entities reviewed 
paid prices for drugs that were higher than the 340B prices.[Footnote 
23] OIG estimated that 14 percent of total drug purchases made by 
entities in June 2005 exceeded the 340B prices, resulting in $3.9 
million in overpayments. We also found that the prices of the eligible 
entities using the rebate option reported to HRSA did not reflect all 
rebates they later received from manufacturers, and thus we could not 
determine whether these entities paid prices that were at or below the 
ceiling established by the 340B prices. Because the 340B prices are not 
disclosed to eligible entities, the entities cannot know how the prices 
they pay compare with the 340B prices. Finally, because 340B prices are 
based on AMP and Medicaid drug rebate data, inaccuracies in those 
amounts affect the 340B drug pricing program. 

Recent legal settlements related to drug manufacturers' overstatement 
of best prices used in the Medicaid rebate program also led to 
settlements related to the 340B program. This was because overstated 
best prices could affect rebates and result in inaccurate 340B prices. 

HRSA has made changes to its oversight of the 340B drug pricing program 
that are intended to address some of the concerns we and OIG raised in 
our respective reports. For example, while manufacturers are not 
required to submit their calculated 340B prices to HRSA, the agency has 
requested that each manufacturer voluntarily submit its calculated 340B 
prices for comparison to the 340B prices calculated by HRSA.[Footnote 
24] It has also indicated that it was planning to develop systems to 
allow eligible entities to check that the drug prices they are charged 
are appropriate while still maintaining the confidentiality of those 
prices. Because AMP is used to calculate 340B prices, the requirement 
under DRA that AMP become publicly available may enable HRSA to improve 
the transparency of these prices. However, the public reporting of AMP, 
which is only one element of the 340B price calculation, can only 
partially improve the transparency of 340B prices. 

Medicare Part D Shares Features with Other Federal Programs and Has 
Certain Features That Suggest Potential Oversight Challenges: 

The Medicare Part D program shares in common certain features with 
other federal programs that help pay for or reduce the cost of 
prescription drugs. Because these features presented oversight 
challenges with other programs, they may also present challenges for 
Part D. Some of the common features include the following: 

* Under Medicare Part D, PDP sponsors are required to calculate and 
report to CMS aggregate price concessions they negotiate. Similarly, 
the Medicaid drug rebate program requires manufacturers to calculate 
and report certain price information to CMS and to include various 
price concessions in the calculations. 

* Medicare Part D relies on PDP sponsors to pass on to beneficiaries 
the benefit of price concessions they negotiate with drug 
manufacturers. Similarly, the Medicaid drug rebate and 340B drug 
pricing programs rely on manufacturers to pass on to states or eligible 
entities the rebates or discounted prices to which they are entitled 
under the programs. 

* Medicare Part D relies on CMS to audit PDP sponsors to ensure proper 
disclosure of price concessions negotiated with manufacturers. 
Similarly, the Medicaid drug rebate and 340B drug pricing programs rely 
on federal audits of manufacturers to ensure that the prices reported 
and charged are appropriate. 

Further, the Medicare Part D program shares in common with the Medicare 
prescription drug discount card program--which preceded Part D-- 
features related to oversight inadequacies we identified with the 
discount card program. Under the discount card program, private 
sponsors negotiated drug discounts for beneficiaries and required the 
card sponsors to report price concessions they received for drugs and 
pass a share of these on to beneficiaries. We reported in 2005 that 
some card sponsors found that the guidance relating to the reporting of 
price concessions provided by CMS lacked clarity, and CMS reported that 
the quality of price concession data provided by card sponsors was 
questionable, with problems such as missing data.[Footnote 25] 

Two other features of the Medicare Part D program suggest potential 
oversight challenges. The first relates to the transition of the nearly 
6 million typically high-cost individuals who qualify for both Medicaid 
and Medicare--referred to as dual eligibles--from Medicaid to Medicare 
Part D for prescription drug coverage. While the Medicaid drug rebate 
program is designed to help control prescription drug spending by 
requiring manufacturers to pay rebates to states, Medicare Part D 
relies on PDP sponsors to negotiate drug prices, including price 
concessions. Part D provides no assurance that the PDP sponsors will be 
able to negotiate price concessions that are as favorable as the 
rebates required under the Medicaid program. It is not yet known how 
the federal cost of prescription drug coverage for dual eligibles under 
Part D will compare with the costs incurred for these individuals under 
Medicaid. 

The second feature relates to the Part D program's reliance on 
contracts with private PDP sponsors. The PDP sponsors provide 
prescription drug coverage to beneficiaries through a complex set of 
relationships and transactions among insurers, PBMs, and drug 
manufacturers. These relationships have similarities to the Federal 
Employees Health Benefits Program (FEHBP), the health care program for 
federal employees, in which the federal government contracts with 
private organizations to provide drug benefits, and these organizations 
often contract with PBMs to negotiate with manufacturers and provide 
other administrative and clinical services.[Footnote 26] The 
relationships and transactions between PBMs and drug manufacturers 
within FEHBP and other federal programs have been the subject of 
litigation. For example, a large PBM agreed to pay about $138 million 
to the federal government in 2005, including about $55 million to the 
FEHBP, to settle allegations that it had received payments from drug 
manufacturers in exchange for marketing certain drugs made by those 
manufacturers to providers who are reimbursed by federal 
programs.[Footnote 27] 

Potential Areas for Future Congressional Oversight: 

Although actions taken by both CMS and HRSA may address some of the 
oversight inadequacies we and others have reported, it is too soon to 
know how effective these have been in improving program oversight. 
Thus, concerns about prescription drug pricing inaccuracies in the 
Medicaid drug rebate and 340B drug pricing programs and overpayments to 
drug manufacturers highlight the importance of federal oversight of 
prices reported by drug manufacturers under these programs. Because the 
new Medicare Part D program shares certain features in common with 
these programs, oversight of the price information reported under Part 
D is important as well. As the Committee develops its oversight agenda 
relating to federal programs that help pay for or lower the costs of 
prescription drugs, it may wish to consider the following areas. 

* The extent to which federal agencies will take steps to 
systematically ensure the accuracy of price data associated with 
federal programs, specifically, 

- the extent to which CMS will ensure that AMP and best prices reported 
by manufacturers under the Medicaid drug rebate program include all 
appropriate transactions and price concessions--particularly once the 
proposed rule is finalized; 

- the extent to which HRSA will ensure the completeness and accuracy of 
the 340B prices it maintains, obtain final prices paid by all covered 
entities, and more systematically compare prices paid by entities with 
the 340B prices; and: 

- the measures CMS will take to ensure that the price information Part 
D sponsors report to CMS include aggregate price concessions sponsors 
negotiate with PBMs and drug manufacturers. 

* Recognizing the evolving nature of purchasers and sellers in the 
prescription drug market, the extent to which CMS will be effective in 
updating and revising Medicaid drug rebate program pricing guidance for 
manufacturers as circumstances warrant. 

* The extent to which the transition of dual eligibles from Medicaid to 
Medicare Part D will affect federal spending. 

* The extent to which cognizant federal agencies will monitor for and 
detect abuses in the reporting of drug price information that affects 
federal programs. 

Mr. Chairman, this concludes my prepared remarks. I would be happy to 
answer any questions that you or other Members of the Committee may 
have. 

GAO Contacts and Acknowledgments: 

For future contacts regarding this testimony, please contact John 
Dicken at (202) 512-7119 or at dickenj@gao.gov. Contact points for our 
Offices of Congressional Relations and Public Affairs may be found on 
the last page of this testimony. Randy DiRosa, Assistant Director; 
Gerardine Brennan; Martha Kelly; Stephen Ulrich; and Timothy Walker 
made key contributions to this statement. 

FOOTNOTES 

[1] Centers for Medicare & Medicaid Services (CMS), Trustees, National 
Health Expenditure, Historical Data (Baltimore, Md: Centers for 
Medicare & Medicaid Services, 2007), [Hyperlink, 
http://www.cms.hhs.gov/NationalHealthExpendData/02_NationalHealthAccount
sHistorical.asp] (accessed Jan. 9, 2007). The prescription drug 
spending figures reflect spending on prescription drugs through retail 
outlets, such as retail pharmacies, but do not account for spending 
through nonretail outlets, such as inpatient hospital or nursing home 
facility settings. 

[2] The total federal contribution to Medicare Part D for 2006 is 
estimated at $58.3 billion, rising to $67.7 billion in 2007. See 2006 
Annual Report of the Boards of Trustees of the Federal Hospital 
Insurance and Federal Supplementary Medical Insurance Trust Funds 
(Washington, D.C.: May 1, 2006). 

[3] The joint federal-state Medicaid program finances medical services 
for certain low-income individuals. Within the Medicaid program, the 
Medicaid drug rebate program requires participating drug manufacturers 
to pay rebates to states as a condition of the federal contribution for 
covered outpatient prescription drugs. The Medicaid and Medicaid drug 
rebate programs are administered by the Centers for Medicare & Medicaid 
Services (CMS). Another federal program, the 340B drug pricing program, 
requires drug manufacturers that participate in the Medicaid program to 
provide drugs at discounted prices to eligible entities such as 
community health centers. The 340B drug pricing program is administered 
by the Health Resources and Services Administration (HRSA). 

[4] See GAO, Medicaid Drug Rebate Program: Inadequate Oversight Raises 
Concerns About Rebates Paid to States, GAO-05-102 (Washington, D.C.: 
Feb. 4, 2005); GAO, Ryan White Care Act: Improved Oversight Needed to 
Ensure AIDS Drug Assistance Programs Obtain Best Prices for Drugs, GAO-
06-646 (Washington, D.C.: Apr. 26, 2006); and GAO, Medicare: CMS's 
Implementation and Oversight of the Medicare Prescription Drug Discount 
Card and Transitional Assistance Program, GAO-06-78R (Washington, D.C.: 
Oct. 28, 2005). 

[5] See 42 U.S.C. § 1396r-8. 

[6] The basic unit rebate amount for a brand name drug is the 
difference between best price and AMP or 15.1 percent of AMP, whichever 
is greater. 

[7] The 340B drug pricing program is named for the statutory provision 
authorizing it, section 340B of the Public Health Service Act (codified 
at 42 U.S.C. § 256b). 

[8] Among other services, community health centers offer primary and 
preventive health services to low-income individuals. Disproportionate 
share hospitals are hospitals that serve a relatively large volume of 
low-income patients and are eligible for payment adjustments under 
Medicare or Medicaid. ADAPs purchase HIV/AIDS drugs for enrolled low- 
income people who are uninsured or underinsured. 

[9] If a drug manufacturer fails to sell drugs at or below the 340B 
prices, it can be dropped as a participating drug provider in the 340B 
and Medicaid programs. 

[10] In general, the 340B price for a covered outpatient drug is based 
on AMP and the total unit rebate amount for the drug. HRSA began 
calculating the 340B prices on October 1, 2005. Previously, CMS 
performed the calculations. 

[11] According to OIG, the confidentiality provision in the Medicaid 
drug rebate program statute related to AMP has been interpreted to mean 
that HRSA may not reveal the 340B prices to the entities. Testimony of 
Stuart Wright, Deputy Inspector General for Evaluation and Inspections, 
Office of Inspector General, U.S. Department of Health and Human 
Services, before the House Committee on Energy and Commerce 
Subcommittee on Oversight and Investigations, December 15, 2005. 

[12] Pub. L. No. 108-173, § 101, 117 Stat. 2066, 2071-2152 (codified at 
42 U.S.C. §§ 1395w-101 to 1395w-152). MMA redesignated the previous 
Part D of title XVIII of the Social Security Act as Part E and inserted 
a new Part D after Part C. 

[13] In the private health insurance market, health plans typically 
contract with PBMs to help manage their prescription drug benefits. 
PBMs negotiate rebates or payments with drug manufacturers, encourage 
substitution of generic drugs for therapeutically similar brand drugs, 
and negotiate discounted prices with networks of retail and mail-order 
pharmacies, passing along at least some of the savings to health plans 
and enrollees. PBMs influence price negotiations with manufacturers 
through formulary development and management and through the large 
market share they often represent. 

[14] MMA prohibits the Secretary of Health and Human Services from 
interfering with price negotiations between PDP sponsors and drug 
manufacturers and pharmacies. Pub. L. No. 108-173, § 101, 117 Stat. 
2066, 2098 (codified at 42 U.S.C. § 1395w-111(i)). 

[15] See GAO, Medicaid Drug Rebate Program: Inadequate Oversight Raises 
Concerns about Rebates Paid to States, GAO-05-102 (Washington, D.C.: 
Feb. 4, 2005). 

[16] When the Medicaid drug rebate program began in 1991, PBMs played a 
much smaller role in the market. 

[17] See Department of Health and Human Services, Office of Inspector 
General, Medicaid Drug Rebates: The Health Care Financing 
Administration Needs to Provide Additional Guidance to Drug 
Manufacturers to Better Implement the Program, A-06-91-00092 
(Washington, D.C.: November 1992) and Medicaid Drug Rebates: Sales to 
Repackagers Excluded from Best Price Determinations, A-06-00-00056 
(Washington, D.C.: March 2001). The other two reports focused on 
individual manufacturers and are not publicly available. Federal law 
permits the Secretary of Health and Human Services to verify 
manufacturer-reported prices, and the Secretary has delegated that 
authority to OIG. OIG regularly conducts audits, evaluations, and 
investigations pertaining to HHS programs. 

[18] Department of Health and Human Services and Department of Justice, 
Health Care Fraud and Abuse Control Program Annual Report for FY 2003 
(Washington, D.C.: 2004). 

[19] Department of Health and Human Services and Department of Justice, 
Health Care Fraud and Abuse Control Program Annual Report for FY 2004 
(Washington, D.C.: September 2005). 

[20] 71 Fed. Reg. 77174 (Dec. 22, 2006). 

[21] Pub. L. No. 109-171, §§ 6001-6003, 120 Stat. 4, 54-61. 

[22] See Department of Health and Human Services, Office of Inspector 
General, Deficiencies in the Oversight of the 340B Drug Pricing 
Program, OEI-05-02-00072 (Washington, D.C.: October 2005), and Review 
of 340B Prices, OEI-05-02-00073 (Washington, D.C.: July 2006). 

[23] See GAO, Ryan White Care Act: Improved Oversight Needed to Ensure 
AIDS Drug Assistance Programs Obtain Best Prices for Drugs, GAO-06-646 
(Washington, D.C.: Apr. 26, 2006). We found that in 2003, all of the 
ADAPs we reviewed that used the direct purchase option reported paying 
prices higher than the 340B prices for at least 1 of the top 10 HIV/ 
AIDS drugs purchased in 2003. 

[24] HRSA indicated that as of July 2006, more than 50 manufactures had 
submitted their data. 

[25] See GAO, Medicare: CMS's Implementation and Oversight of the 
Medicare Prescription Drug Discount Card and Transitional Assistance 
Program, GAO-06-78R (Washington, D.C.: Oct. 28, 2005). To assist 
Medicare beneficiaries with their prescription drug costs before the 
new benefit became available, the MMA required the establishment of a 
temporary Medicare Prescription Drug Discount Card and Transitional 
Assistance Program, which began in June 2004. See Pub. L. No. 108-173, 
§ 101, 117 Stat. 2066, 2131. The drug discount card program offered 
Medicare beneficiaries access to discounts off the retail price of 
prescription drugs at the point of sale. The program was discontinued 
when the new Part D drug benefit became available in 2006. 

[26] FEHBP covers about 8 million federal employees, retirees, and 
their family members, making it the largest employer-based health 
insurance program in the country. In 2003 we reported on the 
relationships between the private insurers that provide coverage to 
federal employees under the FEHBP and the PBMs that administer the 
prescription drug benefit for most FEHBP enrollees. See GAO, Federal 
Employees' Health Benefits: Effects of Using Pharmacy Benefit Managers 
on Health Plans, Enrollees, and Pharmacies, GAO-03-196 (Washington, 
D.C.: Jan. 10, 2003). 

[27] Department of Health and Human Services and Department of Justice, 
Health Care Fraud and Abuse Control Program Annual Report for FY 2005 
(Washington, D.C.: August 2006), and the Office of Personnel 
Management, Office of the Inspector General, Semiannual Report to 
Congress (Washington, D.C.: Nov. 1, 2005). 

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