Medicare and Medicaid to Revise Reimbursements for Prescription Drugs

(4/5/07)- The 2005 Deficit Reduction Act seeks, amongst other things, to reduce the joint federal-state Medicaid program by $8.4 billion over 5 years. The savings would come mainly through changing how the government calculates reimbursement to pharmacies and PBMs. The CMS put forth the proposal in December, and is required by law to finalize the new rule on Medicaid reimbursement by July 1.

The controversy over the new rule centers on the definition of an "average manufacturer price", which is used to calculate the reimbursements to pharmacies for generic drugs. Under the proposal the generic price would take into account the rebates that PBMs receive, even for generic drugs. Most pharmacies do not receive these rebates, so they are paying a higher price for a generic drug than is the average PBM.

The government pays for Medicaid prescriptions in two ways: The federal government reimburses the pharmacy for the cost of the medication, while the state pays the pharmacy a dispensing fee. This dispensing fee is supposed to cover a portion of the pharmacist's salary and store operations.

Total retail prescription sales in 2005 reached $230 billion in 2005 according to government statistics.

(9/20/00)- A civil probe is being conducted as to the legality of prices for prescription drugs being charged to Medicare and to Medicaid. The Philadelphia U.S. attorney's office in conjunction with the Department of Human Health and Services office of the inspector general is handling the investigation.

A preliminary settlement agreement for $14 million has been confirmed by Bayer Pharmaceuticals with federal and state officials concerning illegalities in their drug pricing practices that resulted in Medicare overpaying for prescription drugs for Medicare beneficiaries. The settlement agreement also requires the company to report more accurate price information for all its drugs to state and federal regulators, and to cooperate in the continuing investigation. More than 20 drug companies are said to be under investigation in connection with the investigation. It has been alleged that the drug manufacturers reported artificially high wholesale prices, while actually selling the drugs to doctors at discounts. The difference between the actual price and the reported cost price meant that doctors and others who administer the drugs had a much larger profit margin that resulted in Medicare and Medicaid being defrauded. The drug companies were increasing the profit margins to the providers of their drugs thus increasing the demand for their drugs. As part of the settlement agreement Bayer will report to states an average of the "actual prices" it charges to wholesalers, which is a more accurate measure than the average wholesale price (AWP).

Schein Pharmaceutical, Inc. a generic-drug manufacturer announced in its quarterly filing with the Securities and Exchange Commission that the states of New York, Florida and Nevada had issued subpoenas seeking information on its drug pricing practices.Administrative subpoenas were issued in the summer and fall of 1999 to PCS Health Systems Inc. and Merck-Medco Managed Care LLC two of the largest pharmacy-benefits managers (PBMs). The subpoenas seek to determine if the PBMs received any rebates or discounts from the drug manufacturers. James Sheehan is heading the investigation. If they did receive such rebates or discounts there may have been a violation of the rules that require that Medicaid to pay the best market price for prescription drugs.

Mr. Sheehan stated that "There are many concessions given by manufacturers to PBMs (Prescription Benefits Managers) and to health plans that are not reported to the Medicaid program". PCS Health Systems is a unit of Rite Aid and Merck-Medco is a unit of Merck. Schering-Plough recently disclosed that it had received a subpoena on this matter and several other drugs companies are thought to have received subpoenas also.

The investigation is thought to also include the "pushing" of prescription drugs by the PBMs for the manufacturers of drugs that had given the discounts or rebates to the PBMs. The possibility also exists that the investigation will look into whether or not the HMOs "push" prescription drugs for manufacturers who pay rebates or give discounts to the HMOs. The drug companies also make payments to the PBMs for drug marketing and "disease management" that lowers the price the PBMs pays for the drugs. These payments have not been reported to Medicaid, as the rules require. Another practice that is being questioned is that of the "repackagers". Repackagers fall within a special category of the rules that allow organizations to buy prescription drugs at lower rates.

A spokesman for the inspector general said that in the case of one drug, two HMOs paid 34.3% less than the Medicaid best price. We certainly can not prejudge this matter but it is issues that arise out of investigations like this one that will help determine the future of any legislation regarding prescription drug coverage for Medicare beneficiaries.

Strangely enough Medicare and Medicaid have different reimbursement procedures for prescription drugs. Both however do utilize the average wholesale price, or AWP, to arrive at payment prices for various drugs. The Health Care Finance Administration is expected to announce shortly a revision of the payment amount for various drugs to better reflect a more accurate pricing schedule. When fully implemented the new payments are expected to save the government millions of dollars of overpayments made for both Medicare and Medicaid.

In 1997, Congress reduced Medicare reimbursements to 95% of the AWP. Previously the reimbursements were made at 100% of the AWP. Government fraud investigators for the HCFA examined prices listed in wholesale catalogs sent to doctors and other providers by the drug companies. The AWP price and the catalogue listed price varied greatly, with the AWP price always being the more expensive of the two. First DataBank Inc., a division of Hearst Corp. supplies all states with the AWP for reimbursement purposes for Medicaid. On May 1, 2000 the company switched to the more accurate prices for 50 of the most frequently used drugs by Medicaid patients. Medicare spends about $3 billion a year on drugs. It reimburses providers such as physicians and home health agencies who are the ones who administer the drugs. The VA buys drugs directly from manufacturers or wholesalers, using prices set by the Federal Supply Schedule. States set their own reimbursement rates, subject to upper limits set by the federal government. Medicaid receives rebates from manufacturers. It is alleged that the drug companies, who sell their products to providers at deep discounts, artificially inflate the AWP.


By Allan Rubin
Updated April 5, 2007

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