Fiscal Fitness: How States Cope

Rebates on physician-administered drugs go unclaimed; Medicaid losing out on millions

The Department of Health and Human Services’ Office of Inspector General (OIG) says that in 2001, Medicaid could have saved millions of additional prescription drug rebate dollars if every state had collected rebates for all single-source physician-administered drugs and 40 multiple-source physician-administered drugs. As of March 2003, the OIG says, 24 states did not collect rebates on any physician-administered drugs.

"Our study indicates a state’s savings in a single year could exceed the one-time cost of implementing system changes needed to collect rebates for these drugs," an April 2004 OIG audit report says. "We recommend that the Centers for Medicare & Medicaid Services [CMS] continue to encourage all states to collect rebates on physician-administered drugs, especially single-source drugs. As part of this effort, CMS should encourage cooperation and sharing of information between states that collect rebates for these drugs and states that do not, to facilitate rebate collection."

The Medicaid drug rebate program was established in 1990 to reduce state and federal Medicaid expenditures for prescription drugs. Under the program, manufacturers are required to provide a rebate on drugs paid for by a state. Drugs that a medical professional administers to a patient in a physician’s office — known as physician-administered drugs — are covered under the program.

To collect the rebates, states must identify the drugs by their national drug code and provide units paid data to the company. Unlike self-administered drugs that typically are billed to states with national drug codes, physician-administered drugs are more often billed with procedure codes. States that use procedure codes to bill physician-administered drugs need a crosswalk to national drug codes to collect rebates on the drugs. (A crosswalk is the identification of equivalent national drug codes for drugs represented by procedure codes.)

The national drug code is an 11-digit numeric code, divided into three segments, that identifies the firm that manufactures, distributes, or repacks the drug product; the specific strength, dosage form, and formulation of the product for a particular firm; and the product’s package size. The procedure code is a five-digit alphanumeric code that identifies a drug by its generic name, route of administration (oral or injection), and identifies the number of drug units allowed per reimbursement for that code.

The OIG found that in 2001, 17 states collected rebates for physician-administered drugs and 31 states did not. Of the 17 that collected rebates, three — Hawaii, Missouri, and Pennsylvania — collected them on all physician-administered drugs and used national drug codes for billing. The remaining 14 states used procedure codes and crosswalked procedure codes to national drug codes for single-source drugs, collecting rebates only on those drugs.

"If all states had collected rebates for all single-source and 40 multiple-source physician-administered drugs, Medicaid could have added $37 million to its rebate savings for 2001," the OIG report says.

After 2001, seven of 31 states that had not collected rebates on physician-administered drugs began to do so. Of those seven, six collect rebates on single-source, physician-administered drugs, and one collects rebates on all physician-administered drugs billed by a targeted group of providers. The OIG estimated that the 2001 potential savings for those seven states was $14 million on all single-source and 40 multiple-source physician-administered drugs.

Some states don’t plan rebates

As of March 2003, 24 states still did not collect rebates on any physician-administered drugs. Those states spent a total of $125 million on physician-administered drugs. Five of the 24 said they have no plans to collect rebates. While 19 of the 24 said they plan to collect rebates, 13 of the 19 did not have specific rebate collection plans, according to the OIG.

The inspector general says rebates for physician-administered drugs help states reduce prescription drug expenditures, which are rising at a time when state budgets are severely stressed. Based on cost estimates provided by states that have implemented changes to collect rebates for physician-administered drugs, savings from rebates in the first year can exceed the one-time cost of implementing system changes.

The report recommends that CMS continue to encourage all states to collect rebates on physician-administered drugs, especially single-source drugs. As part of that effort, the OIG says, CMS should encourage cooperation and the sharing of information between states that collect rebates for the drugs and states that do not, to facilitate rebate collection. "It would be valuable for states that do not collect rebates for physician-administered drugs to know the details of implementing system changes, such as the what, where, when, and why of resources needed, and how the process unfolded for states that have been down this road," the OIG comments. "CMS could also issue a letter to state Medicaid directors informing them about the availability and usefulness of the Medicare crosswalk. States could use this crosswalk, which is on the Internet, to reduce the administrative costs of creating and/or updating their own crosswalk."

CMS follows recommendations

According to the inspector general, CMS agreed with the recommendation and is currently facilitating information sharing. The agency is giving information to states seeking help to collect rebates and providing contact names in states that have experience obtaining rebates. The OIG says CMS disagreed with the $37 million estimate of potential savings. The OIG says it used information provided by states in the calculation of potential savings and acknowledged that savings in future years will depend on rebate amounts and utilization and would likely be different from 2001.

(To read the report, go to www.oig.hhs.gov.)