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Executive Summary

Texas' Dept. of Human Resources is trying to base Rx drug reimbursement levels under Medicaid on whslr. acquisition costs plus a "reasonable" markup, rather than on average whsle. price (AWP). The state is collecting data on acquisition costs from whslrs. It would then add a "reasonable" markup to arrive at an estimated acquisition cost of purposes of setting reimbursement limits. Two-thirds of the Rx drugs reimbursed by the state are purchased by pharmacy providers through whslrs. For drugs purchased direct from mfts., the state department relies on direct pricing information which it has collected from mfrs. to establish reimbursement ceilings. The Texas effort to collect actual acquisition costs is cited in a recently rleased report by the HHS Inspector General on Medicaid acquisition cost estimates. The report urges the Health Care Financing Administration (HCFA), the federal agency responsible with states for implementing drug reimbursement programs under Medicaid, to work with Texas and other states "in arriving at improved upper limits for drug reimbursement." The Inspector General added that Texas' "plans are compatible with the findings in this report." The HHS report, entitled "Changes to the Medicaid Rx Drug Program Could Save Millions," maintains that "considerable savings will accrue to the states and the federal govt. if states will make a greater effort to determine more closely the price pharmacists pay for drugs, rather than using" the average whsle. price (AWP). HHS has sent the report to state medical assistance agencies nationwide. The report, which was based in part upon an audit of drug purchases by pharmacies in six states, states that "99.6% of pharmacy purchases are made at prices averaging below the AWP, and yet 27 states rely on AWP almost exclusively in establishing their estimated acquisition cost levels" for reimbursement purposes. The report points out that "approximately 80%," or $1.3 bil. of the $1.7 bil. total annual Medicaid expenditures "are reimbursed with AWP serving as the upper reimbursement limit." HCFA could use the report as the foundation for a new round of drug reimbursement policy changes should HHS decide to renew efforts to contain pharmaceutical costs. Noting that HHS Secty. Heckler has established a dept. task force to examine reimbursement issues, the report asserts that its findings "will be of value to the task force." AWP "means non-discounted list price," and "pharmacies purchase drugs at prices that are discounted significantly below AWP or list price," the report continues. Consequently, Inspector General estimated "that as much as $128 mil ($72 mil. federal share) could be saved annually through changes in program policy and regulations which would restrict the use of AWP as an upper limit in drug reimbursements. Federal savings over the next five years could amount to at least $360 mil." Discounts below AWP or list price offered by mfrs. through direct sales were even greater than the discounts offered by whslrs., the report states. Direct purchase discounts averaged 21.2% whereas whslr. discounts averaged 13.6%, it said. Referring to HHS Secty. Heckler's task force on drug rimbursement, the report asserted that its findings "are pertinent to the task force's study." The Inspector General recommended that HCFA revise its regulations to "preclude the general use of AWP as the state agencies' 'best estimate of prices providers generally are paying for drugs.'" HCFA responded to a draft of the Inspector General's report in a May 22 memorandum. The report notes that HCFA generally agreed with the report except for the recommendation to revise regulations. The report states that "HCFA is not prepared to recommend any changes in federal regulations until the secty. makes a decision regarding the findings of the special task force appointed to review the existing Rx drug regulations." The task force held a two-day public hearing on drug reimbursement issues last fall ("The Pink Sheet" Sept. 19, 1983, p. 4). It has not yet announced its findings. State Medicaid agencies should also be required to describe "menthods being used to establish upper reimbursement limits" and to assure HCFA that the methods "result in pricing estimates as close as feasible to the prices generally being paid by the providers," the report states. Lower Acquisition-Cost Reimbursements Might Be "Resented" Unless Dispensing Fees Are Raised - HCFA The Inspector General also recommended that HCFA issue guidelines on setting "acceptable drug reimbursement limits" and "work with state agencies in developing alternative" methodologies. For example, the report explains, HCFA should assist Texas in its current efforts, as "it may be feasible and more economical for HCFA to collect data on mfrs.' prices to whslrs. and furnish such data to all states. Also, HCFA should assist interested state agencies in the effort to determine a reasonable markup on whslrs.' cost." Finally, the report recommends that HCFA review its system for supplying pricing data to states. HCFA should be sure that prices collected from pharmacies "reflect purchase and trade discounts received. Collection of mfrs.' prices to whslrs. (whslrs.' cost) may result in data more useful to states in arriving at economical reimbursement limits for drugs," the Inspector General suggested. HCFA agreed that it should explore "alternative data sources to assist states in determining acquisition costs" and advise states of the "problems of using AWP," the report continues. HCFA responded that it already furnishes "considerable guidance to the states on how to implement the estimated acquisition cost provisions," the report states, but the agency agreed "there is a need for additional direction." The HHS reimbursement unit also agreed with the intent of the recommendation that the agency help states develop alternative drug reimbursement methodologies, the Inspector General reported. However, HCFA is concerned that "any attempt to obtain actual drug product costs will be resented by the pharmaceutical industry." HCFA suggested "that any reduction in [estimated acquisition cost] screens by HCFA may well result in pressure by the pharmaceutical industry to increase state dispensing fees accordingly and the net result may be zero." Texas' agency officials have already received infomal comments from the Texas Pharmaceutical Assn., most recently in an Oct. 31 meeting. The assn. has said Medicaid reimbursements to pharmacists are currently too low, and in pharmacy, any redefinition of acquisition costs should be offset by an increase in dispensing fees. The Inspector General's audit involved "fieldwork" in six states -- Arkansas, Colorado, Massachusetts, Michigan, North Carolina, and Oregon -- and "inquiries in 41 additional states," the report notes. In addition to the 27 states that rely on AWP almost exclusively for setting reimbursement ceilings, the other 20 states based their upper limits "to a great extent on AWP." The report estimates that approximately "11% of the Medicaid drug reimbursement is in excess of cost plus dispensing fees in those states using AWP." Of the estimated $1.3 bil. that was reimbursed using AWP, "approximately $735 mil. was paid in 27 states using AWP almost exclusively," the Inspector General reported; consequently, "about 11% or $81 mil. of these expenditures were unnecessary." In addition, the remaining 20 states had expenditures of about $590 mil. based on AWP; however, these states had already avoided sizeable excess payments through the use of cost containment techniques," the report continues. "As a result, only about 7.9%, or $47 mil. of their expenditures are estimated as unnecessary."

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