Medicaid Prices and Prescription Drug Rebates: Does Proposed Rule Address Long-Held Concerns?

For years, the Office of Inspector General (OIG), the Government Accountability Office (GAO), and state governments all have contended that Medicaid pays too much for prescription drugs. Before the Deficit Reduction Act of 2005 (DRA) (P.L. 109-171), the law and regulations based Medicaid’s upper payment limits for multiple source drugs on published prices in national compendia. States were supposed to use the compendia and upper limits to arrive at the “estimated acquisition cost”  and add a reasonable dispensing fee.  The national compendia were commercial publications  based on information supplied by the manufacturers. Investigators found that the reported prices were inflated, sometimes fraudulently. The OIG found in 2005 that while drug manufacturers were required to report to CMS the prices they were paid by wholesalers, that information was not available to states because it was proprietary.

With the DRA, Congress tried to address the pricing problem by establishing a new methodology based on the “average manufacturer price” (AMP),  defined as the the actual price received by a manufacturer from a wholesaler for distribution to the retail pharmacy class of trade. The law required drug makers to report the number of unit doses sold for each form and dosage of each drug, to CMS. Instead of setting payment limits by reference to published compendia, CMS was to use the data submitted by manufacturers to calculate the average AMP; the upper limit would be 250 percent of that average.

The DRA required CMS to set upper limits for “multiple source drugs”, a term defined in the statute. In July, 2007, CMS published regulations implementing the changes. Two organizations of pharmacies sued. In  December, 2007, a federal court ruled that the regulations were invalid because the definitions of “AMP” and “multiple source drug” were broader than the statute allowed.The court found that the druggists would suffer irreparable harm from the disclosures and price-setting pursuant to the invalid regulation and enjoined CMS from either basing FULs on the reported data or disclosing  the data to the the states.  Subsequently, Congress directed the agency to suspend further implementation of the rule until at least September, 2009.

Because the DRA disclosure and pricing requirements were  never implemented, states remained in the dark about the prices drug makers received for their products. The pre-DRA regulations remained in force.

Since 1990, drug makers have been required to enter into rebate agreements with the states if they want their drugs to be eligible for Medicaid reimbursement.  The rebates are paid according to a complex  formula based on manufacturers’ reports of AMP and their “best price”  combined with utilization data.  Before the DRA, the OIG has found that states’ billing and collection for the rebates has varied considerably. States did not consistently bill promptly, seek collection of unpaid rebates or charge interest on past due payments.  They also did not have access to the drug makers’ reports. These two aspects of Medicaid prescription drug financing were compartmentalized.

The Patient Protection and Affordable Care Act (P.L. 111-148), as amended by the Health Care and Education Reconciliation Act (P.L. 111-152) made several changes to the DRA provisions affecting drug pricing and the Medicaid prescription drug rebate program.  The legislation clarified and refined the definitions of AMP and best price, adding to the lists of transactions that were included or excluded from consideration. The upper payment limit for Medicaid prescription drug payments will be set by the Secretary but must be “no less than” 175 percent of AMP plus a reasonable professional dispensing fee.  PPACA also amended the definition of multiple source drug to clarify the requirement that three drugs be found by the Food and Drug Administration  (FDA) to be  therapeutically and pharmaceutically equivalent as well as bioequivalent. The health reform laws also increased the minimum percentages for the rebates to be paid by manufacturers and provided that the increased rebates will be offset by the federal government against the states’ claims (that’s another story).

Recently CMS published a proposed rule to implement the changes. Under that rule, states are not to use the estimated acquisition cost, average wholesale price or wholesale acquisition cost to compensate pharmacies. Instead, they would use the actual acquisition cost, defined as the state’s “determination of the actual prices paid by pharmacy providers to acquire drug products marketed or sold by specific manufacturers”.  State agencies are expected to obtain this information through surveys or “other reliable data based on sales transactions.”  And when they ask to change the rates in the state plan, they would be required to use this data, which could be a national survey, to show that the rates comply with a statutory requirement that rates be consistent with efficiency, economy and quality of care.

CMS did hire a contractor to perform national annual surveys of retail pharmacies to obtain information about their costs and the prices they charge consumers. The proposed rule would not require it to share the information with states.  So—the manufacturers have marketed their products aggressively, and perhaps unlawfully, promoting them to providers and practitioners based on their profitability, and have paid millions to states to settle allegations of false or off-label marketing, and the states might get some help  surveying the pharmacies.  Maybe the light is better over there.