Fiscal Fitness: How States Cope - GAO report finds Medicaid lax drug price oversight is costing taxpayers millions
GAO report finds Medicaid lax drug price oversight is costing taxpayers millions
A new report from Congress’ General Accounting Office (GAO) said lax oversight by the Centers for Medicare & Medicaid Services (CMS) has resulted in taxpayers overpaying for prescription drugs purchased by Medicaid.
"The Medicaid best price law is designed to keep drug manufacturers from overcharging taxpayers," said Rep. Henry Waxman (D-CA), who released the report. "The GAO report shows that lax oversight is costing the taxpayers millions. These problems could be fixed, but the agency has been dragging its feet for years."
The GAO reported:
1. Some drug manufacturers use illegitimate methods to set their prices, potentially costing taxpayers millions of dollars. Thus, the report noted, manufacturers are failing to include some discounts, such as prompt payment discounts and administrative fees paid to purchasers, in their rebate calculations. As a result of such practices, Medicaid overpays for prescription drugs. The GAO reported that in one case, it found adequately accounting for the fees would have increased rebates for some drugs by 16%.
2. CMS program oversight is inadequate. The GAO found that CMS conducted only "minimal oversight" of drug prices and conducted no review of manufacturers’ methods for determining and reporting their "best price." As a result, manufacturers who ignore the law’s requirements are unlikely to be caught, according to the GAO.
3. Price concessions negotiated by pharmacy benefit managers are not included in best price calculations. Pharmacy benefit managers have become increasingly important providers of prescription drugs, the GAO said. Because of their buying power, they can obtain large price concessions from manufacturers. But CMS has failed to issue guidance that would allow many of the low prices obtained by the benefit managers to be included in price calculations.
The GAO’s recommended solution is for CMS to establish clear guidance on pricing methods and the definition of best price and that the agency improve its oversight processes.
Mr. Waxman noted that the administration’s FY 2006 budget proposal calls for eliminating the best price provision from Medicaid. "I oppose these changes," he said. "The law guarantees that taxpayers get the best deal, and we should keep the law and make it work. Repealing it would be a huge gift to drug manufacturers."
Senate Finance Committee Chairman Chuck Grassley (R-IA), who joined with Waxman in requesting the report, agreed that CMS needs to take a much more aggressive role in controlling Medicaid spending on prescription drugs by making sure states get the full rebate to which they are entitled.
"For the last 10 years, federal officials have left the program vulnerable to tremendous waste, fraud, and abuse," Mr. Grassley declared. "Administrators need to move quickly to update the way these prices are determined to prevent taxpayers from being shortchanged hundreds of millions, and possibly billions, of tax dollars."
Nearly $1 billion recovered
In November 2004, Taxpayers Against Fraud reported that $535 million in federal dollars and $413 million in state dollars had been recovered through whistle-blower cases from 2001-2003 in which drug manufacturers were charged with drug-pricing fraud.
Additional settlements are expected, according to that report, because some 100 whistle-blower cases remain under seal involving allegations against more than 200 drug companies.
According to Mr. Grassley, the whistle-blower provisions of the False Claims Act are proving to be a valuable weapon in protecting the Medicaid program against fraud by drug makers, but "no time should be wasted by CMS in bringing its own methods up to date and preventing this waste of resources for such an important health care program."
Mr. Grassley said GAO had found that the Department of Health and Human Services Office of Inspector General (OIG) had issued only four audit reports on drug company reported prices since the program began.
In its defense, the OIG said it had been hampered by unclear CMS program guidance and a lack of drug company documentation. But according to GAO, even when the OIG had managed to identify problems related to drug companies’ reported prices and methodologies for price reporting, CMS has not done much to resolve them.
Companies set own prices
In remarks to the Senate, Mr. Grassley said the drug rebate program is governed by a contractual agreement between states and each drug company that wants to participate in Medicaid.
"One of the things that boggles the mind is that this contract allows drug companies to rely upon reasonable assumptions,’" he said. "Each drug company may craft its own assumptions as long as they are consistent with the intent of the law. Consequently, because drug companies can pick their own methods, they in effect set their own prices and the amount of rebates they pay."
According to the GAO, "CMS does not generally review the methods and underlying assumptions that [drug companies] use to determine [the reported prices], even though these methods and assumptions can have a substantial effect on rebates. . . . CMS sometimes identifies price reporting errors, but does not follow up to verify that errors have been corrected.
"In sum, the GAO report confirms that neither CMS nor the OIG know the extent to which Medicaid overpays for prescription drugs because the program lacks effective management and oversight. A worse state of affairs is not likely.
"Drug companies have been profiting for the past 15 years on Medicaid drug pricing. We are dealing with a system that unnecessarily costs taxpayers untold hundreds of millions, if not billions, of dollars annually. The Medicaid drug rebate program is quite simply a mess, a Medicaid mess," the GAO said.
Clawback could dry up savings
Meanwhile, state Medicaid officials reportedly have expressed concern to CMS Administrator Mark McClellan that the new Medicare prescription drug benefit won’t reduce state drug costs as promised. The potential problem involves the so-called dual eligibles — those who are eligible for both Medicare and Medicaid.
Prescription drug coverage for dual eligibles will shift from Medicaid to Medicare when the new benefit takes effect in 2006. But, for instance, California projects it will have $215 million more in prescription drug costs as a result of the new Medicare law, despite promises of savings for states, as a result of "clawback" payments to the federal government.
California Medicaid official Stan Rosenstein told Mr. McClellan. Under the clawback provision, states in 2006 will be required to pay the federal government 90% of the dual eligibles’ prescription drug costs.
Since states have been paying 100% of the costs, the Bush administration sees the change as a 10% saving on drug costs for states. But some state officials are saying the savings won’t be realized because their clawback payments will be based on state outlays from 2003.
Some state officials say they have reduced drug outlays since 2003 through cost-saving techniques such as preferred drug lists, rebates, and other tactics, so the 90% payment based on 2003 outlays will not accurately reflect current spending levels.
They also believe that rebates received in 2004 for 2003 outlays should be factored into the 2003 baseline for clawback payments. Another concern for states reportedly is an inflation factor built into the clawback payment formula.
Over time, state clawback payments will decline to 75% of prescription drug costs for dual eligibles, but the inflation factor will limit savings. Officials told Mr. McClellan that states that have worked to cut dual eligibles’ drug costs since 2003 should not be subject to the clawback inflation factor.
Mr. McClellen reportedly responded that the states will save $8 billion over 10 years from the Medicare drug benefit, including savings for dual eligibles and new coverage for retired state employees. Mr. McClellan also responded to concerns over administrative costs of enrolling people in the drug benefit, saying that states will receive matching payments.
Governors want changes
The National Governors Association (NGA) adopted a resolution urging regulatory and legislative changes "to ensure that the congressional intent of the program is realized and all states gain some form of relief."
The resolution said that many states are concerned that the Medicare prescription drug plans will not be as effective as the states have been in negotiating drug prices, therefore establishing a national growth average that is too high at the outset.
"Because states never stop paying less than 75% of a baseline number that is too high to begin with, many feel that they will never be held harmless from the negative impacts of the clawback," the resolution said.
NGA also said that state spending on dual eligibles may rise higher than it would have without the Medicare drug benefit for another reason — outreach efforts to sign up people for the benefit likely will add to the number of people dually enrolled in both Medicaid and Medicare because many people who are eligible for Medicare are not now enrolled in that program.
The governors said that because of this "woodwork effect," the number of dual eligibles may increase substantially, resulting in a clawback payment for states that is higher than states would have spent on pharmacy without the drug benefit.
The NGA suggested applying the clawback to a more recent base year to account for state efforts to control pharmacy costs in recent years.
A CMS spokesman said that the agency wants states to get all the savings to which they are entitled, but said that if states want to change the baseline year, they will have to do that through Congress. The spokesman also said that new data indicate that the woodwork effect is not going to be as great as states have thought and states still will come out ahead.
States can evaluate programs
For states that want to identify and explore solutions to potential problems in their Medicaid prescription drug program, Mathematica Policy Research has released new data on Medicaid prescription drug use and reimbursement in 1999. Prepared under a contract with CMS, the data are organized into 27 uniformly formatted tables for each state and the nation as a whole to facilitate comparisons. States can use the tables to find areas in which they are outliers, compared with other states and the national average, and explore potential explanations.
Mathematica Policy Research’s James Verdier says states can use their own more recent Medicaid data to assess in-state trends since 1999. Mr. Verdier outlined in a Mathematica Issue Brief a process states can follow with the data tables. He uses the Indiana tables to illustrate how the process can be followed:
• Identify problems. By looking at the national comparisons, states can identify areas in which they are outliers. For example, in Indiana the Medicaid prescription drug reimbursement per benefit month in 1999 was just a bit above the national average, ranking 22nd in the nation. But Indiana spent more per benefit month than any other state on beneficiaries who were aged, dually eligible, and/or living all year in a nursing facility. Because the categories overlap substantially, the data suggest that the outlier status probably is caused by volume of use and/or price per drug for Medicaid prescriptions in nursing facilities.
• Assess changes. The prescription drug marketplace has experienced many changes since 1999 in drug prices, new brand name drugs, new generic substitutes, and drug manufacturer marketing efforts. Mr. Verdier said these are national factors not likely to have had major differential impact from state to state. But there have been some state initiatives that could affect Medicaid prescription drug use, including changes in populations covered by capitated managed care; changes in coverage of prescription drugs in capitated managed care benefit packages; changes in payments to pharmacies; changes in beneficiary copayments; more stringent requirements for generic substitution; implementation of preferred drug lists; more stringent prior authorization requirements; more thorough prospective or retrospective drug utilization reviews; quality initiatives aimed at more appropriate use of psychotropics and other drugs; disease management programs; and state prescription drug purchasing pools.
• Analyze state claims, eligibility, and provider data. States, Mr. Verdier said, should look next at their Medicaid prescription drug claims and eligibility data for the years after 1999 to determine if the 1999 patterns still prevail. Officials should look for new trends or breaks in old trends, focusing on areas where problems appear the same as or larger than in 1999. "Look at price, utilization, brand vs. generic, and prescription drug use in specific settings and for specific eligibility groups," he advised. "An important part of the analysis is to drill down in the data to identify providers or provider types that may account for a significant portion of pharmacy expenditures, since service reimbursement and use in Medicaid are often driven more by providers than by beneficiaries." Because the new data tables don’t include information on providers other than their ID numbers, states need to link Medicaid claims files to Medicaid provider files."
• Identify solutions. The final step is to identify solutions for addressing problems that show up in the data. Mr. Verdier said the state initiatives outlined in step two are the major tools available to control prescription drug use and reimbursement.
[The GAO report is available on-line at www.gao.gov/new.items/d05102.pdf. Information on the clawback controversy is available at www.nga.gov. Contact Mathematica’s Mr. Verdier at (609) 799-3535.]
A new report from Congress General Accounting Office said lax oversight by the Centers for Medicare & Medicaid Services has resulted in taxpayers overpaying for prescription drugs purchased by Medicaid.
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