Medicaid Prescription Drugs:

CMS Should Implement Revised Federal Upper Limits and Monitor Their Relationship to Retail Pharmacy Acquisition Costs [Reissued on February 6, 2014]

GAO-14-68: Published: Dec 19, 2013. Publicly Released: Jan 22, 2014.

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What GAO Found

To develop a national benchmark for retail pharmacy acquisition costs of Medicaid covered outpatient prescription drugs--known as the National Average Drug Acquisition Cost (NADAC)--the Centers for Medicare & Medicaid Services (CMS) within the Department of Health and Human Services (HHS) surveys each month randomly selected retail community pharmacies for invoice data on their actual drug acquisition costs. CMS then calculates an average acquisition cost for each drug based on invoice data received from about 500 to 600 pharmacies. CMS officials expressed confidence in their current process, but noted that some limitations may exist. For example, CMS officials stated the extent to which NADACs reflect rebates and discounts is limited because most occur off-invoice or are not tied to a specific drug purchase. CMS has developed and published more than 5,000 NADACs, which CMS has estimated apply to more than 90 percent of the drug claims reimbursed by Medicaid.

GAO found that the total draft federal upper limits (FUL) amount based on the new formula under the Patient Protection and Affordable Care Act (PPACA) was about 1.4 percent lower than the total NADAC amount in aggregate for 1,035 outpatient drugs subject to the FUL in first quarter 2013. GAO found large differences between the total PPACA-based FUL amount and the total NADAC amount for generic and for branded generic versions--brand-name drugs with other versions that can be substituted for one another--of the drugs subject to the FUL in first quarter 2013.

GAO found that the total PPACA-based FUL amount for the generic versions was 19 percent higher than the total NADAC amount, but for the branded generic versions was 26 percent lower. GAO's work indicates that CMS is close to having a formula under which FULs would better reflect pharmacy acquisition costs, but continues to apply FULs that were calculated more than 4 years ago. Additionally, the relationship between PPACA-based FULs and NADACs may be affected by several factors, including rebates and discounts that are not reflected on pharmacy invoices. To determine whether GAO's early results of the relationship between the PPACA-based FULs and the NADACs holds over time will require continued monitoring by CMS.

Why GAO Did This Study

States reimburse pharmacies for covered outpatient prescription drugs dispensed to Medicaid beneficiaries. For certain multiple-source outpatient prescription drugs, federal matching funds that states receive to reimburse pharmacies are limited by FULs. In 2010, PPACA modified the FUL formula to better reflect pharmacy acquisition costs and thus more effectively control Medicaid expenditures. However, CMS has not yet implemented the PPACA formula and continues to use FULs that were published in September 2009. CMS currently publishes draft PPACA-based FULs. CMS also created the NADACs for states to consider when setting reimbursement rates.

You asked GAO to look at the NADAC and the PPACA-based FULs. This report (1) describes how CMS develops the NADACs and (2) examines how PPACA-based FULs compare to the NADACs. GAO compared draft FULs and NADACs for first quarter 2013 in aggregate across all multiple-source outpatient prescription drugs subject to the FUL. GAO also reviewed CMS documentation and interviewed CMS officials on how the NADACs are developed and PPACA-based FULs are calculated.

What GAO Recommends

GAO recommends that the CMS Administrator (1) expeditiously implement the PPACA-based FUL formula and (2) monitor the relationship between the PPACA-based FULs and the NADACs on an ongoing basis. HHS concurred with these recommendations.

For more information, contact John E. Dicken at (202) 512-7114 or dickenj@gao.gov.

Recommendations for Executive Action

  1. Status: Closed - Implemented

    Priority recommendation

    Comments: On February 1, 2016, CMS published a final rule that implemented the PPACA-based FUL formula with an exception. The exception allows for the use of a higher multiplier to calculate the FULs based on acquisition costs for certain multiple source drugs. Specifically, in situations where the PPACA-based FUL--calculated at an amount equal to 175 percent of the of the weighted average of the most recently reported monthly average manufacturer price (AMP)--is less than the average retail community pharmacies' acquisition cost, CMS will establish the FUL using a higher multiplier so that the FUL amount would equal the most current average retail community pharmacies' acquisition cost as determined by the most current national survey of such costs. On February 22, 2016, CMS published a methodology and data elements guide that stated the agency will use the most current monthly National Average Drug Acquisition Cost (NADAC) pricing files to implement the exception. On March 1, 2016, CMS posted the first file of PPACA-based FULs consistent with the final rule on Medicaid.gov. CMS will post updates to the FUL on a monthly basis.

    Recommendation: The Secretary of HHS should direct the Administrator of CMS to expeditiously implement the PPACA-based FUL formula to better control federal reimbursement for Medicaid covered outpatient prescription drugs.

    Agency Affected: Department of Health and Human Services

  2. Status: Open

    Comments: As part of the final rule implementing the PPACA-based FUL formula, CMS monitors the relationship between the FUL and the NADAC for individual drugs on an ongoing basis and ensures that the FUL does not fall below the NADAC. CMS, however, does not monitor the relationship between the FUL and NADAC in aggregate. This monitoring would provide CMS information on the extent to which the FUL effectively controls federal Medicaid expenditures, particularly in cases where there may be potential for over-reimbursement. CMS officials expect that, by mid-2017, many states will determine reimbursement using an average acquisition cost based on the NADAC. As a result, any potential variation between the FUL and NADAC would be reduced according to CMS officials. We plan to obtain state plan amendments from CMS to confirm whether states are reimbursing at an average acquisition cost or using some other methodology to control Medicaid expenditures.

    Recommendation: The Secretary of HHS should direct the Administrator of CMS to monitor the relationship between PPACA-based FULs and the NADACs on an ongoing basis to help determine whether PPACA-based FULs effectively control federal Medicaid expenditures without reducing beneficiary access to drugs subject to FULs over time.

    Agency Affected: Department of Health and Human Services

 

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