Medicaid Outpatient Prescription Drugs:

Second Quarter 2008 Federal Upper Limits for Reimbursement Compared with Average Retail Pharmacy Acquisition Costs

GAO-10-118R: Published: Nov 30, 2009. Publicly Released: Dec 28, 2009.

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Medicaid--the joint federal-state program that finances medical services for certain low-income adults and children--spent $15.0 billion on outpatient prescription drugs in fiscal year 2007. Instead of directly purchasing drugs, state Medicaid programs reimburse retail pharmacies for dispensing them to Medicaid beneficiaries. The federal government provides matching funds to states to help cover the costs of their Medicaid programs, and states must pay the remaining costs to qualify for these federal funds. For certain outpatient prescription drugs, state Medicaid programs may only receive federal matching funds for reimbursements up to a maximum amount known as a federal upper limit (FUL). Designed to control drug spending, FULs are currently calculated as 150 percent of a drug's lowest published price in three national drug pricing compendia. State Medicaid programs can determine reimbursements to retail pharmacies for each drug, but the federal government will only provide matching funds to the extent that reimbursements for all drugs subject to FULs do not exceed established FULs in the aggregate. A 2005 report by the Department of Health and Human Services' (HHS) Office of Inspector General (OIG) found that FULs were ineffective at controlling outpatient Medicaid prescription drug spending. The Deficit Reduction Act of 2005 (DRA) included provisions--the implementation of which has been delayed by judicial and legislative action--that would change the methodology for calculating FULs. Under the DRA, FULs would be calculated as 250 percent of the average manufacturer price (AMP) for a drug's least costly therapeutically equivalent version. In 2006, the Congressional Budget Office estimated that the implementation of AMP-based FULs would reduce total Medicaid spending for prescription drugs by $11.8 billion from 2007 through 2015. However, retail pharmacies have raised concerns that AMP-based FULs would not be sufficient to cover their costs of acquiring drugs dispensed to Medicaid beneficiaries. Two retail pharmacy industry groups, the National Association of Chain Drug Stores (NACDS) and the National Community Pharmacists Association (NCPA), have claimed that AMP-based FULs would make some retail pharmacies unprofitable and thus limit certain Medicaid beneficiaries' access to retail pharmacies. A 2006 GAO report and a 2007 report by the HHS OIG both found that AMP-based FULs would have been lower than average pharmacy acquisition costs, on a drug-by-drug basis, for most drugs included in the respective samples. To implement the DRA provisions pertaining to prescription drugs in Medicaid, CMS published a final rule in July 2007. This rule includes provisions regarding the calculation of AMP-based FULs that might also affect how they compare to pharmacy acquisition costs. For example, FULs apply only to certain outpatient prescription drugs--known as multiple-source drugs--and the rule changed the definition of multiple-source drugs. Additionally, to minimize the effect of outliers, the final rule included a provision which would use the second-lowest AMP for a multiple-source drug to set the FUL if the lowest AMP is less than 40 percent of the second-lowest AMP. The final rule requires drug manufacturers to report AMP data on a monthly basis, and drug manufacturers and state Medicaid programs were expected to begin complying with the provisions of the final rule by October 1, 2007.

If AMP-based FULs had been in place in the second quarter of 2008, they would have been lower than average retail pharmacy acquisition costs, in general, for most of the drugs in our sample and in the national aggregate. The median AMP-based FULs for the second quarter of 2008 would have been lower than average retail pharmacy acquisition costs for 54 of the 83 drugs in our sample; 44 drugs had FULs that would have been at least 25 percent below acquisition costs. In the aggregate, the FULs would have been 17 percent lower than acquisition costs, though the difference varied significantly by state, from 57 percent lower to 49 percent higher. However, 64 drugs had at least one therapeutically equivalent version with acquisition costs below the FUL, indicating that pharmacies may be able to substitute lower-priced therapeutic equivalents to bring their costs below the FUL. AMP-based FULs also varied significantly throughout 2008 for 38 drugs, in some cases exceeding the average retail pharmacy acquisition cost one month and falling below it in another month. While partly due to monthly increases or decreases in AMPs, variation also occurred because manufacturers did not report AMP data each month for 11 percent of the therapeutically equivalent versions of the drugs in our sample. If a manufacturer reports the AMP for the lowest-priced therapeutically equivalent version of a drug one month but does not report it the next month, the FUL may change. In its written comments on a draft of this report, CMS disagreed with our finding that if AMP-based FULs had been in place in the second quarter of 2008, they would have been lower than average retail pharmacy acquisition costs for most of the 83 drugs in our sample and in the national aggregate. In particular, CMS expressed concerns about our data source used to estimate average retail pharmacy acquisition costs, including that it does not take into account discounts and rebates that drug manufacturers may provide to retail pharmacies. CMS also expressed concerns about our methodology and inconsistencies between our finding and the findings of an HHS-OIG report, which the OIG shared with us because it has not been publicly issued as of November 2009. However, as we indicate in this report, data on discounts and rebates pharmacies receive are not readily available. We used the most complete, accurate, and verifiable data sources available at the time of our analysis to estimate average retail pharmacy acquisition costs. We believe that these data are sufficiently accurate to achieve the objective of our work. Furthermore, our methodology is sound and any inconsistencies between our finding and the findings of the HHS-OIG report, which was based on data from the fourth quarter of 2007, are largely due to significant fluctuations in drug prices over time.

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