With Congress and the Administration seriously considering the possibility of substantial Medicaid changes, the Department of Health and Human Services’ Office of Inspector General issued three reports last week that may serve as the basis for significant Medicaid drug pricing reform. The OIG reports, and accompanying testimony, came as part of a two-day Senate Finance Committee hearing on waste, fraud, and abuse in the Medicaid program.
"Years of work can be summarized in one sentence," the OIG’s Robert Vito, Regional Inspector General for the Office of Evaluations and Inspections, told the Senate Finance Committee June 28, 2005. "Medicaid pays too much for prescription drugs because the program relies on published prices that do not accurately reflect pharmacy acquisition costs."
Overall, the OIG found that statutorily defined prices based on actual sales— namely average manufacturer price (AMP) and average sales price (ASP)—are substantially lower than published prices, such as average wholesale price (AWP) and wholesale acquisition cost (WAC).
Statutorily defined, sales-based prices are also lower than the states’ estimated acquisition cost formulas, which are based on AWP and WAC, according to the OIG. In addition, the differences between statutorily defined sales-based prices and published prices are particularly large for generic drugs compared with brand name drugs, the OIG added.
The OIG released three separate reports. A brief summary of each follows.
Medicaid Drug Price Comparisons: Average Manufacturer Price to Published Prices
This report examined prices for Medicaid-reimbursed drugs (24,101 national drug codes). It found that, at the median, AMP is 59 percent lower than AWP. In comparison, the median AWP-based state-estimated acquisition cost formula is AWP minus 12 percent. There seemed to be little acceptance on the part of OIG of the argument that the AWP-based reimbursement may be necessary to address insufficient administration and dispensing fee reimbursements.
The difference between AMP and published prices was greatest for generic drugs, the OIG reported. For generic drugs,AMP is 70 percent lower than AWP at the median. In comparison, AMP is 23 percent lower than AWP at the median for single source brands and 28 percent lower for multisource brands.
Medicaid Drug Price Comparison: Average Sales Price to Average Wholesale Price
The second report examined prices for Medicare-covered drugs (2,077 national drug codes), which the Medicaid program may cover on an optional basis. The OIG found that ASP is 49 percent lower than AWP. The difference between ASP and AWP was also greatest for generic drugs, similar to the companion report. For single source brand codes,ASP is 26 percent below AWP at the median, and for multisource brand codes,ASP is 30 percent below AWP at the median.
For generic national drug codes, ASP is 68 percent less than AWP at the median, according to the OIG, which also found that the differences between AWP and other prices analyzed are similar for both reports. The OIG stated that the difference between AMP and AWP for generic drugs is 72 percent for Medicare-covered drugs. For single source and multisource brand drugs, this report found that the differences between AMP and AWP for Medicare-covered drugs are 22 and 25 percent, respectively.
Comparison of Medicaid Federal Upper Limit Amounts to Average Manufacturer Prices
In this inspection, the OIG found that, overall, federal upper limit amounts were five times higher than AMP for generic drug products in the third quarter of 2004. During the same period, the federal upper limit amount was, on average, 22 times higher than the lowest reported AMP.
According to the OIG, if Medicaid based federal upper limit amounts on reported AMPs, the program could save hundreds of millions of dollars per year. The OIG recommended that CMS work with Congress to set federal upper limit amounts that more closely approximate acquisition costs. CMS concurred with the OIG’s recommendation.
The Outlook for Reform
The Committee’s apparent consensus regarding the current Medicaid drug pricing methodology deficiencies would appear to increase the potential for a Medicaid reform package. However, it should be noted that Congress has heard similar testimony from various quarters in the past. The outlook for significant Medicaid reform this year is still less likely than it appears to be for next year.
Notably, the OIG strongly advocated in favor of scrapping the current Best Price methodology with a flat rebate, which is consistent with the proposal contained in the Administration’s latest budget. The references to AWP in the OIG reports also present the option of an ASP-based reform, which could, conceivably, also lead to refinements in the Medicare program’s ASP methodology.
To view the OIG reports in their entirety, please visit:
Medicaid Drug Price Comparisons: Average Manufacturer Price to Published Prices (OEI-05-05-00240) http://www.oig.hhs.gov/oei/reports/oei-05-05-00240.pdf
Medicaid Drug Price Comparison: Average Sale Price to Average Wholesale Price (OEI-03-05-00200) http://www.oig.hhs.gov/oei/reports/oei-03-05-00200.pdf
Comparison of Medicaid Federal Upper Limit Amounts to Average Manufacturer Prices http://www.oig.hhs.gov/oei/reports/oei-03-05-00110.pdf
This article has been prepared by Sidley Austin Brown & Wood LLP for informational purposes only and does not constitute legal advice. This information is not intended to create, and receipt of it does not constitute, an attorney-client relationship. Readers should not act upon this without seeking professional counsel.