This is the accessible text file for GAO report number GAO-06-69R entitled 'Medicaid: States' Payments for Outpatient Prescription Drugs' which was released on November 30, 2005. This text file was formatted by the U.S. Government Accountability Office (GAO) to be accessible to users with visual impairments, as part of a longer term project to improve GAO products' accessibility. Every attempt has been made to maintain the structural and data integrity of the original printed product. Accessibility features, such as text descriptions of tables, consecutively numbered footnotes placed at the end of the file, and the text of agency comment letters, are provided but may not exactly duplicate the presentation or format of the printed version. The portable document format (PDF) file is an exact electronic replica of the printed version. We welcome your feedback. Please E-mail your comments regarding the contents or accessibility features of this document to Webmaster@gao.gov. This is a work of the U.S. government and is not subject to copyright protection in the United States. It may be reproduced and distributed in its entirety without further permission from GAO. Because this work may contain copyrighted images or other material, permission from the copyright holder may be necessary if you wish to reproduce this material separately. October 31, 2005: The Honorable Edward Whitfield: Chairman: Subcommittee on Oversight and Investigations: Committee on Energy and Commerce: House of Representatives: Subject: Medicaid: States' Payments for Outpatient Prescription Drugs: Dear Mr. Chairman: Spending on outpatient prescription drug coverage for Medicaid beneficiaries has accounted for a substantial and growing share of Medicaid program expenditures.[Footnote 1] All states and the District of Columbia have elected to include outpatient prescription drug coverage as a benefit of their Medicaid programs. Total Medicaid expenditures on outpatient prescription drugs grew from $4.6 billion (nearly 7 percent of Medicaid's total medical care expenditures) in fiscal year 1990 to $33.8 billion (13 percent of Medicaid's total medical care expenditures) in fiscal year 2003. This represented more than twice the rate of increase in total Medicaid spending from fiscal year 1990 through fiscal year 2003. Amid concerns about increasing Medicaid drug spending, focus has been drawn to the ways states pay for prescription drugs. State Medicaid programs pay pharmacies for covered outpatient prescription drugs dispensed to Medicaid beneficiaries. The Centers for Medicare & Medicaid Services (CMS)--the agency of the Department of Health and Human Services (HHS) that oversees states' Medicaid programs--sets maximum payment limits for certain drugs--federal upper limits (FUL)[Footnote 2]--and provides guidelines regarding drug payment, as defined by regulation.[Footnote 3] Within these parameters, states may determine their own drug payment methodologies. States are to pay pharmacies the lower of the state's estimate of the drug's acquisition cost to the pharmacy, plus a dispensing fee, or the pharmacy's usual and customary charge to the general public; for certain drugs, the FUL or the state maximum allowable cost (MAC) may apply if lower.[Footnote 4] All states estimate the acquisition cost of drugs using published prices because they do not have access to actual sales price data, which are not publicly available. Most states choose to estimate drug acquisition cost by taking a percentage discount off of Average Wholesale Price (AWP).[Footnote 5] AWP is a list price that a manufacturer suggests wholesalers charge pharmacies. Based on concerns about escalating Medicaid drug expenditures, you asked us to review state Medicaid payments for covered outpatient prescription drugs. We reviewed how Medicaid payments for prescription drugs compared across selected states and how these states' Medicaid payments for prescription drugs compared to three market-based prices. We briefed your staff on the information contained in this report on September 16, 2005. As discussed with your staff at that time, we agreed to issue this report, which officially transmits the briefing slides (see enc. I) and expands on the information provided at the briefing. Scope and Methodology: To examine state Medicaid payments for outpatient drugs, we analyzed CMS data to develop a basket of 200 drugs that accounted for more than half of Medicaid's national spending on outpatient prescription drugs in 2003.[Footnote 6] We judgmentally selected five states for review-- Mississippi, Montana, Pennsylvania, South Carolina, and Utah; these states utilize a varying percentage discount off of AWP to estimate drug acquisition cost. We interviewed officials from the five states' Medicaid agencies to gather information on each state's pharmacy payment practices. We also obtained the five states' 2003 payment data for each of the 200 drugs in our basket. For every drug, we calculated each state's payment per unit.[Footnote 7] Using these calculations, we reviewed the variation in the percent difference between the lowest state payment and the highest state payment for each drug. We report our findings based on drug type (brand or generic) and drug therapeutic class based on data we obtained from First DataBank.[Footnote 8] To compare state Medicaid payments to selected market-based prices, we reviewed how states' average payments compared to three prices that are based on actual sales transactions--Average Manufacturer Price (AMP), Best Price, and Federal Supply Schedule (FSS) Price. We selected AMP and Best Price because they are currently used in the Medicaid program to calculate drug rebates;[Footnote 9] FSS Price was selected because it represents prices available to certain federal government purchasers. Table 1 provides descriptive characteristics of these prices. We obtained AMP and Best Price data from CMS and FSS Price data from the Department of Veterans Affairs (VA).[Footnote 10] We assessed the variation in the percent difference between each state's payment and the states' average payment, to each of the market-based prices. Table 1: Characteristics of Selected Market-Based Prices: [See PDF for image] Source: GAO analysis of CMS and VA data. Note: Retail pharmacies that dispense prescription drugs to Medicaid beneficiaries may be unable to purchase drugs at AMP, Best Price, or FSS Price. [A] See 42 U.S.C. § 1396r-8(k)(1). According to CMS, transactions used to calculate AMP are to reflect cash discounts and any adjustments that affect the price realized, but are not to include prices to direct federal purchasers based on the Federal Supply Schedule (FSS), prices from direct sales to hospitals or health maintenance organizations, or prices to wholesalers when they relabel drugs they purchase under their own label. There is no definition in the statute for "retail pharmacy class of trade." [B] The Omnibus Reconciliation Act of 1990 created AMP and Best Price for use in the Medicaid program to calculate drug rebates. As we noted in our February 2005 report, we found considerable variation in the methods manufacturers used to determine AMP and Best Price. See GAO, Medicaid Drug Rebate Program: Inadequate Oversight Raises Concerns about Rebates Paid to States, GAO-05-102 (Washington, D.C.: Feb. 4, 2005). [C] See 42 U.S.C. § 1396r-8(c)(1)(C). CMS has further defined Best Price as the lowest price at which the manufacturer sells the drug to any purchaser in any pricing structure, including capitated payments, with some exceptions. Best Price is required to be reduced to account for price adjustments such as discounts and rebates, but is not to include prices charged to certain federal purchasers (including prices to direct federal purchasers based on the FSS) and other select purchasers. [D] See Pub. L. No. 102-585, § 603, 106 Stat. 4943, 4971-75. The Veterans Health Care Act of 1992 required that drug manufacturers list their brand-name drugs on the FSS in order for purchases of such drugs to be eligible for Medicaid payment. During a multiyear contract period, FSS Prices may not increase faster than inflation. [End of table] While we generally relied on and did not independently verify the data provided to us by the states, we reviewed the data for reasonableness and to identify unusual patterns, including outliers. To ensure that state payments and market-based prices were based on the same number of units, we compared the units used to calculate both. Where necessary, we recalculated unit payments to ensure valid per-unit comparisons. We also reviewed the reasonableness of states' payments in comparison to their formulas for estimating acquisition cost. Additionally, we discussed unusual patterns and outliers with state Medicaid officials and as a result of unresolved data reliability concerns, eliminated six drugs from our basket.[Footnote 11] Our final basket contained 194 drugs, which consisted of 189 brand-name drugs--187 single-source and 2 multiple-source drugs--and 5 generic drugs.[Footnote 12] Our results cannot be generalized to states or drugs not included in our analysis. Our work also did not consider other mechanisms state Medicaid programs may use to control the costs of prescription drugs, such as the collection of rebates through federal and state programs and policies on the mandatory use of generic drugs. Furthermore, our analysis did not examine the utilization of drugs and therefore does not estimate cost savings for the Medicaid program. We performed our work from February 2004 through October 2005 in accordance with generally accepted government auditing standards. Results in Brief: Overall, minimal variation existed among the five states' payments for most drugs. Specifically, the five states' payments for 189 brand-name drugs varied less than 7 percent on average; the five states' payments for the 5 generic drugs we reviewed varied 30 percent on average. States' payment levels aligned with their respective formulas for estimating drug acquisition cost. In particular, states that based their estimates of drug acquisition cost on larger discounts off of AWP often paid the lowest amount for drugs; similarly, states that based their estimates of drug acquisition cost on smaller discounts off of AWP often paid the highest amount for drugs. The five states' payments exceeded the three market-based prices we reviewed--AMP, Best Price, and FSS Price. Each state's payments exceeded these market-based prices for nearly all of the brand-name drugs we reviewed. On average, each state's payments for brand-name drugs exceeded each market-based price by 10 percent or more. Additionally, states' average payments for brand-name drugs were 12 percent higher than AMP, 36 percent higher than Best Price, and 73 percent higher than FSS Price, on average. Our results highlight the differences between states' payments (based on the lower of states' estimates of drug acquisition cost or the pharmacy's usual and customary charge; for certain drugs, the FUL or the state MAC may apply if lower) and market- based prices (based on actual sales transaction data). Agency and State Comments: We provided a draft of this report for comment to the Administrator of CMS and Medicaid directors in Mississippi, Montana, Pennsylvania, South Carolina, and Utah. CMS comments are included in enclosure II. We received technical comments from some states, which we incorporated as appropriate. CMS stated that this report makes it clear that the current payment rules result in overpayments for drugs and emphasizes the need for reform. CMS commented that payments should be determined using accurate acquisition cost data, which it said requires congressional action. Our review focused on describing how payments for prescription drugs compared across selected states and how these states' payments compared to three market-based prices. As such, the scope of our work did not include an evaluation of the need to reform the current payment system. CMS also commented that it has encouraged states to review their estimates of drug acquisition cost and that states have submitted to the agency an increased number of amendments to their state Medicaid plans that would lower these estimates. Finally, CMS commented that the report focused solely on states' payment rates for drugs and did not consider a variety of other approaches that states have adopted to control their drug spending. As we noted in our draft report, such consideration was beyond the scope of our work. One state--Utah--raised concerns that states do not have access to the market-based pricing data we used in our analysis, which makes it difficult for them to accurately estimate the acquisition cost of drugs. Our draft report noted that states do not have access to actual sales price data and that states therefore use published prices, such as AWP, to estimate the acquisition cost of drugs. As agreed with your office, unless you publicly announce the contents of this report earlier, we plan no further distribution of it until 30 days from the date of this report. At that time, we will send copies to the Administrator of CMS and interested congressional committees. The report will also be available on GAO's home page at http://www.gao.gov. If you or your staff have any questions about this report, please contact me at (202) 512-7119 or firstname.lastname@example.org. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. GAO staff who made major contributions to this report are listed in enclosure III. Sincerely yours, Signed by: Kathleen M. King: Director, Health Care: Enclosures - 3: Enclosure I: [See PDF for images] [End of slide presentation] [End of section] Enclosure II: Comments from the Centers for Medicare & Medicaid Services: DEPARTMENT OF HEALTH & HUMAN SERVICES: Centers for Medicare & Medicaid Services: Administrator: Washington, DC 20201: DATE: OCT 19 2005: TO: Kathleen M. King: Director, Health Care: U.S. Government Accountability Office: FROM: Mark B. McClellan, M.D., Ph.D.: Administrator: Centers for Medicare & Medicaid Services: SUBJECT: Government Accountability Office's (GAO) Draft Report: Medicaid: States' Payments for Outpatient Prescription Drugs (GAO-06- 69R): Thank you for the opportunity to comment on the above-referenced draft report. The report reviews State Medicaid payments for covered outpatient prescription drugs under the Medicaid drug rebate program. Specifically, the report examines (1) how Medicaid payments for outpatient prescription drugs compare across selected States and (2) how selected States' Medicaid payments compare to market-based prices. As for every major payer in this country, prescription drug costs in Medicaid have increased substantially and account for a growing share of Medicaid program expenditures. The Centers for Medicare & Medicaid Services (CMS) shares the GAO's concerns regarding the increase in Medicaid spending for prescription drugs and the high reimbursement levels paid by States. Federal regulations at 42 CFR 447.331 require States to pay for prescription drugs at the lower of estimated acquisition cost or usual and customary charges. Absent a more accurate source of price data, States rely on prices published by drug compendia to estimate acquisition costs. The regulations at 42 CFR 447.332 also require CMS to set upper limits for certain multiple source drugs. The GAO report makes clear that the current payment rules result in overpayments for drugs and emphasizes the need for reform. The President's fiscal year (FY) 2006 budget proposes to solve this problem by basing Medicaid drug payment on average sales prices (ASP). The FY 2006 budget proposal would require drug manufacturers to report the ASP for each drug and would cap Federal payment, in the aggregate, at ASP plus 6 percent. As long as States must rely on prices that are not based on market prices paid to manufacturers, they lack sufficient information to set appropriate payment amounts. Current wholesale acquisition cost (WAC) and average wholesale prices (AWP) are greatly inflated, in part because higher list prices from manufacturers result in greater profits to pharmacies when payment is set in relation to the artificial prices. Requiring manufacturers to report true market based prices and limiting Medicaid payment to a reasonable amount above these prices will eliminate the opportunity for manufacturers and pharmacies to gain through reporting inflated prices, yield substantial State and Federal government savings, and retain flexibility for States to set prices for individual drugs as they find appropriate within the overall cap. The GAO report finds that Medicaid payments exceed market based prices, but it provides no new or additional information regarding the true acquisition cost of drugs. CMS continues to believe that an accurate acquisition cost should be used to determine payments. This requires Congressional action to define acquisition cost in statute, require manufacturers to report this cost to the Federal government, and set a cap on Federal reimbursement to States based on this cost. As long as States must rely on data submitted by manufacturers which is inflated, States will continue to pay at rates not reflective of market prices. Numerous reports and studies on acquisition costs for brand name and generic drugs reimbursed under Medicaid have recommended that CMS require States to bring drug reimbursement more in line with the actual acquisition cost. Absent a change in the law, CMS has encouraged States to review their estimates of acquisition costs in light of those findings. Additionally, CMS continuously monitors States' estimated acquisition costs and provides a quarterly update on the CMS website. These actions have resulted in States submitting an increased number of State plan amendments to lower their estimates of acquisition costs. This report focused solely on payment rates to compare States drug spending. We note that States have adopted a variety of approaches to reduce prescription drug spending. These include establishing preferred drug lists, negotiating supplemental rebates (either individually or with other States), and expanding prior authorization requirements. The findings did not consider these other mechanisms State Medicaid agencies use to control the costs of prescription drugs. Thank you again for the opportunity to respond to the report. [End of section] Enclosure III: GAO Contact and Staff Acknowledgments: GAO Contact: Kathleen M. King, (202) 512-7119 or email@example.com: Acknowledgments: In addition to the contact named above, Debra Draper, Assistant Director; Jennie Apter; Robin Burke; Jessica Cobert; Martha R. W. Kelly; Kevin Milne; Daniel S. Ries; and Patricia Roy made key contributions to this report. (290329): FOOTNOTES  Medicaid is a joint federal-state program that finances health insurance for certain low-income adults and children.  See 42 C.F.R. § 447.332 (2004). Federal regulations require CMS to set specific FUL amounts for certain multiple-source drugs that are provided by at least three suppliers. A multiple-source drug is a drug that is either marketed or sold by two or more manufacturers or labelers, or marketed or sold by the same manufacturer or labeler under two or more different proprietary names or both under a proprietary name and without such a name. Payments for these drugs must not exceed, in the aggregate, a reasonable dispensing fee plus an amount that equals 150 percent of the lowest published price of the drug listed in national pricing compendia.  See 42 C.F.R. § 447.331 (2004).  As of December 2003, 38 states had established maximum allowable costs for multiple-source drugs at a rate below an established FUL or for drugs for which CMS had not set an FUL.  States may obtain AWP from one or more national pricing compendia; although multiple sources publish price lists, the prices listed by one source do not necessarily equal the prices listed by other sources.  For the purpose of this report, the term drug refers to a distinct national drug code (NDC). NDCs identify unique formulations of each drug, including the manufacturer, strength, and package size. A single drug may have multiple NDCs. Because our analysis was performed at the NDC level, multiple versions of the same drug are included in our basket.  State's payment per unit was the state's payment to pharmacies as determined by the lowest of: the state's estimate of drug acquisition cost, the pharmacy's usual and customary charge, the FUL, if available, or the state MAC, if available, divided by the number of units dispensed. Our report summarizes results from our analysis of states' payments per unit as calculated without dispensing fees.  Drugs that possess similar chemical structures and similar therapeutic effects are grouped into therapeutic classes. Most drugs within a class produce similar benefits, side effects, adverse reactions, and interactions with other drugs and substances.  The Omnibus Budget Reconciliation Act of 1990, Pub. L. No. 101-508 § 4401, 104 Stat. 1388-143-1388-161, established the Medicaid drug rebate program to help control Medicaid drug spending. Under the rebate program, a pharmaceutical manufacturer pays rebates to states in order for federal payments to be available under Medicaid for the manufacturer's outpatient drugs.  AMP and Best Price data are reported quarterly; we obtained data on both prices for all four quarters of 2003 and calculated the average 2003 AMP and Best Price. FSS Price is reported based on a contract period; if more than one contract was in place during calendar year 2003, we averaged the available 2003 FSS Prices for the purposes of our analysis.  Five of the six excluded drugs were antihemophiliac factor drugs; the sixth drug was an injectable drug used to treat multiple sclerosis. As a result of data reliability concerns, we also excluded data on five drugs from one state, and data on one drug each from two states.  For the purposes of this report, we refer to single-source and multiple-source drugs that are marketed under a registered trade name as brand-name drugs. Single-source drugs are brand-name drugs that have no generic equivalent on the market and are generally available from only one manufacturer.