OIG: States could have saved $470 million if they had done more to control costs of drugs

According to the Department of Health and Human Services Office of the Inspector General (OIG), there’s a critical need for states to better control the cost of their Medicaid drug programs, and the OIG also suggests that a different type of payment methodology could have saved Medicaid $470 million in 1999.

Centers for Medicare & Medicaid Services (CMS) officials say they agree with the OIG’s conclusions and will urge states to act.

In a March 2 report, Medicaid Pharmacy — Actual Acquisition Cost of Generic Prescription Drug Products, Inspector General Janet Rehnquist said most states use an average wholesale price (AWP), minus a percentage discount that varies state by state, as a basis for reimbursing pharmacies for drug prescriptions. This recent review, she says, is intended to help develop an estimate of the discount below AWP at which pharmacies purchase generic drugs.

The OIG obtained pricing information from 217 pharmacies in eight states — Colorado, Florida, Indiana, Montana, Texas, Washington, West Virginia, and Wisconsin — leading to an analysis of 8,728 invoice prices for generic drug products. Each invoice drug price was compared to AWP for the drug, and any discount percentage was calculated.

"We estimated that the actual drug-acquisition cost was a national average of 65.93% below AWP," Ms. Rehnquist wrote in a cover letter with the report to CMS Administrator Thomas Scully.

"Our previous estimate, based on calendar year 1994 pricing data, showed a discount of 42.45% below AWP for generic drugs. As a result, this review showed an increase of 55.31% in the average discount below AWP for generic drugs from 1994 to 1999," she wrote.

The analysis included four types of pharmacies: rural-chain, rural-independent, urban-chain, and urban independent, and excluded results from nontraditional pharmacies. (See chart, below.)

Drug-Acquisition Costs of Generic Drugs

Category Percent Below AWP (Point Estimate 1999)  Sample Pharmacies  Prices Compared
Rural-Chain 64.39% 52 2,073
Rural-Independent 66.64% 55 1,142
Urban-Chain  66.97% 56 4,492
Urban-Independent  63.79% 54 1,022
Nontraditional  67.07% 58 1,185
Overall (Exc. Nontrad) 65.93% 217 8,728
Source: Department of Health and Human Services, Office of the Inspector General, Washington, DC.

Unlike brand-name drugs for which reimbursement is based predominantly on a discounted AWP, reimbursement for generic drugs can be limited by federal upper-limit amounts.

The OIG says that while the estimate of the discount below AWP of invoice price for generic drugs was significant, the difference was mitigated by federal upper-limit amounts. The upper limits are based on 150% of AWP for the lowest-priced generic equivalent. For generic drugs that do not have an upper limit assigned, reimbursement of the ingredient cost is the same as for brand name drugs.

"The difference between what Medicaid reimbursed for ingredient cost and our estimate of the amount pharmacies actually paid could be as much as $470 million for [calendar year] 1999," Ms. Rehnquist said.

"The majority, $364 million, of the difference was attributable to the 104 drugs without upper limits established. Reimbursement for 72 of the 96 drugs with upper limits was $115 million more than the estimated cost, while reimbursement for the remaining 24 drugs was $9 million less than the estimated cost," she added

Even while claiming large possible savings, she pointed out that the calculations do not incorporate all the complexities of pharmacy reimbursement and that acquisition cost is just one factor in pharmacy reimbursement policy.

Mr. Scully says CMS agrees that an accurate estimate of the acquisition cost should be used to determine drug reimbursement. He says the agency will strongly encourage states to reevaluate their reimbursement methodology for drugs and that he will continue to encourage states to look for an alternate basis for reimbursement.

Meanwhile, the state of Nevada has filed suit against 12 major drug companies, charging them with fraudulently inflating the price of Medicaid-and Medicare-covered drugs. The suit says the manufacturers illegally manipulated the AWP on a wide range of drugs.

Observers say litigation is gaining steam as the newest technique states use to control drug costs as many states are preparing or considering such suits.

Robert Reid, administrator for the Department of Job and Family Services pharmacy program in Columbus, OH, tells State Health Watch that his state recently lowered its reimbursement level to pharmacies. Effective May 1, Ohio will reimburse at wholesale acquisition cost (WAC) plus 9% and a dispensing fee, rather than the previous formula of WAC plus 11% and a dispensing fee.

And in Texas, drug utilization review director Curtis Branch tells SHW that the Texas Health and Human Services Commission Vendor Drug Program in Austin is reviewing drug acquisition costs through a process of pharmacy invoice audits. That analysis should be completed by late June, he says. In addition, a consultant is doing a statewide study of pharmacy dispensing costs to determine the appropriate pharmacy fee level in the state.

"It is important to adjust both sides of the equation, product cost and dispensing costs," Mr. Branch says, "to ensure that the prudent pharmacy operation is appropriately reimbursed to ensure access to prescription drug services for Medicaid/ CHIP recipients. Preliminary review of the data indicates there may be some decrease in product cost reimbursement. Both of these studies should be completed by mid- to late summer, and the final results will be used to determine adjusted reimbursement rates for both product cost and fee."

Both Mr. Reid and Mr. Branch are members of a technical advisory group on pharmacy issues established by the National Association of State Medicaid Directors.

[The OIG report is available at http://oig.hhs.gov/oas/reports/region6/60100053.pdf. Contact Mr. Reid at (614) 466-6420 and Mr. Branch at (512) 338-6922.]