Congress looks at Medicaid drug spending

Poor monitoring of market prices for prescription drugs leaves many states paying inflated costs and adds to spending growth in the program.

By Joel B. Finkelstein — Posted July 25, 2005

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Washington -- Medicaid's drug rebate formula is failing to accurately track the price of drugs, according to lawmakers who would like to change how the program pays for medicines.

The program has become the single largest purchaser of prescription drugs, spending $33.8 billion in 2003. While overall Medicaid spending grew an average 10% annually between 2000 and 2003, drug spending grew by an average 18% a year, according to the Government Accountability Office.

With the size and cost of Medicaid continuing to rise dramatically, drug spending could begin to crowd out other priorities, such as physician reimbursement, because funding for the program isn't increasing at the same rate, lawmakers say. That, combined with recent reports that Medicaid is overpaying for medications due to problems with the rebate formula being used, makes drug spending an area ripe for overhaul by a Congress seeking to reign in the program's cost.

"The potential remedies for this flawed payment policy are varied and complex. What is clear, however, is that states and the federal government simply cannot continue to pay more than they should for prescription drugs under Medicaid," said Rep. Michael Bilirakis (R, Fla.), vice chair of the House Energy and Commerce Committee.

In a hearing in June before the E&C's health subcommittee, government officials and other experts explained that despite statutory requirements that Medicaid get the "best price" for drugs, the program is often paying more than market price, especially for generics.

"Generic drugs are supposed to promote competition and lower costs, but under Medicaid's rules, this system has been turned on its head," said Rep. Nathan Deal, (R, Ga.), the subcommittee's chair.

Under federal statute, drug manufacturers are required to give Medicaid a rebate on their drugs that is equal to either 15.1% of a drug's price or the biggest discount given to any private payer, whichever is larger. Medicaid calculates the rebate based on one measure, the average manufacturers' price. But Medicaid reimburses pharmacists based on another measure, the average wholesale price, which has been found to be wildly inaccurate in many cases, testified Douglas Holtz-Eakin, PhD, director of the Congressional Budget Office.

Consequently, the inflated average wholesale price that drugmakers report themselves results in the government spending millions of extra dollars on drugs. The effect is even more pronounced for generic drugs. Although generics still offer considerable savings over brand-name pharmaceuticals, the low cost of producing generics results in even greater spread between Medicaid's purchase price and pharmacies, Holtz-Eakin said.

Also presented at the hearing, a GAO report found the Centers for Medicare & Medicaid Services has not provided proper oversight over reporting of average wholesale prices to ensure they reflect the market. "CMS conducted only limited checks for reporting errors in the prices," said Kathy King, GAO health care director.

But drug spending is up because prescribing is up, said Craig Fuller, the National Assn. of Chain Drug Stores's president. The difference between what Medicaid pays and what pharmacies pay is not a markup, he said. "There is a cost associated with dispensing, and the margin has to cover that cost."

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External links

"Medicaid Drug Price Comparisons: Average Manufacturer Price to Published Prices," Dept. of Health and Human Services Office of Inspector General report, June, in pdf (link)

"Medicaid Drug Price Comparison: Average Sale Price to Average Wholesale Price," OIG report, June, in pdf (link)

"Comparison of Medicaid Federal Upper Limit Amounts to Average Manufacturer Prices," OIG report, June, in pdf (link)

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