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Executive Summary

The Michigan Department of Social Services calculates that under HCFA's PhIP proposal the state would spend almost $77,000 per year more on acetaminophen w/codeine tabs (30 mg) than it currently does. In Sept. 22 comments to the Health Care Financing Administration, Michigan noted that in 1985 acetaminophen w/codeine tabs were used almost 8.2 mil. times under the state program. Based on a current average cost for the product in the state program of $ .0569 per tab and an estimated PhIP cost of $ .0663, the state found an additional cost per tab of $ .0094. For the full state usage of the drug, the added product costs would be $76,847. The state compared that extra product cost to its administrative expenditures for the current program. The state declared "to maintain the entire state MAC program for almost 100 drug entities with wholesaler surveys, our state's [administrative] costs were substantially less than $77,000." The added incentive costs to encourage generic dispensing, the state said, do not translate into program savings. "Michigan Medicaid already has a high rate of generic utilization," the state said. The Michigan Department of Social Services' comments were submitted in response to HCFA's Aug. 19 Federal Register notice of proposed options for changing Medicaid Rx drug reimbursement. "Our program would prefer the 'State Discretion' option over the three proposals: Pharmacists Incentive Program (PhIP), Revised Maximum Allowable Cost (Re-MAC), and Competitive Incentive Program (CIP)," declared Agnes Mansour, PhD, Director of Michigan's Department of Social Services. The Michigan preference for state flexibility in determining Medicaid drug reimbursement is representative of a groundswell of opposition to PhIP and CIP by state administrations and state legislators. PhIP Would Disrupt Wholesaler Discounts On Generic Lines And Could Raise Across-The-Board Prices The Texas Department of Human Services, for example, told HCFA that it could only support CIP if the program permitted states to use "any alternative reimbursement system provided aggregate payments under that system [would] not exceed the CIP upper limit." Texas also required that state plans would not have to be approved on methodology but simply on whether they met financial goals. The Texas health department said it believes "the use of the CIP as a methodology would prove inflationary, and Texas probably would not implement the CIP without evidence to the contrary." The state cited its "experience with the difficulty in determining true 'usual and customary' prices for providers" as a reason for calling marketplace systems "naive." Michigan also objected to PhIP based on the potential effects of the plan on wholesalers. The state pointed out that to qualify for full-line discounts, wholesalers generally stock only two or three different lines. Under PhIP, however, wholesalers might be forced to purchase many different lines to meet program limits. The result would be "price increases . . . because wholesalers will not receive the discounts for purchasing an entire manufacturer generic line." Michigan also expressed concern about PhIP limits for low volume drugs. Based on its experience with the MAC program, the state anticipates that approval of exceptions to PhIP would be "lengthy and usually not granted." According to the PhIP proposal, pharmacies would be required to stock both generics and brandnames (for "dispense as written overrides"). The state Medicaid staff maintained that in cases of low drug volume, potential generic savings do not warrant the costs of the pharmacy's dual inventory. HCFA had suggested a $50,000 per year savings floor for a product to be included in PhIP -- i.e., if savings on a drug from changing to PhIP would be less than that, the drug would not be included. Michigan urged that the limit to be increased to $750,000 or $1 mil. per year savings. PhIP does not contain any incentives for the prescriber to match the dispensing incentives, Michigan noted. "In the proposed PhIP," the state said, "physicians are still not given an incentive to prescribe generics, and furthermore, provisions for 'Dispense As Written Over-rides' still exist." The Michigan Medicaid department was most strongly opposed to the CIP option, "because of its many administrative costs for both the program and providers." CIP screens, Michigan argued, "would require a complete re-write to reporting and invoice processing systems; would present difficulties adjusting data with the many and constant manufacturer price increases that could occur between the reporting period and the processing time of the CIP prices." Furthermore, "if CIP screens did not cover the acquisition costs for product, much administrative time will be spent resolving pharmacy concerns." Administrative costs "may be greater than potential savings," the state maintained, because the program would end up concentrating on dispensing fees which represent 25% of expenditures. As a pharmacy cannot charge less than the cost of the drug and still make a profit, Michigan said "CIP seems to be based on savings from pharmacy competition of discounted dispensing fees." CIP Could Not Hold Back Manufacturer Price Increases, Michigan Says Another objection to CIP expressed by the state was that retail screens would not adjust for manufacturer increases. "Basing prices on historical patterns of reimbursement minus the mandated government discount would pose problems with representing the CONTINUED MANUFACTURER PRICE INCREASES reperienced by pharmacies," Michigan explained. Product costs, the state said, "are escalating at times up to 20% per patient from one year to the next [due to] . . . manufacturer increases on individual products and from more expensive products entering the marketplace." The Michigan Department of Social Services challenged the revised MAC proposal, saying that although Re-MAC limits would not be placed on multiple source drugs with less than $50,000 total annual Medicaid expenditures, problems would still exist with dual inventory on low volume drugs. "Such a limit could allow Re-MACs on drugs will monthly expenditures of less than $100 per month in individual states," Michigan said. In such cases, the state added, "it may not be worthwhile to install special billing and processing procedures." The Michigan Department of Social Services argued that the state should be allowed to continue its current reimbursement system. "Michigan had the seventh lowest pharmacy cost per patient in 1983," the department claimed. Michigan attributed the success of its program in part to its "policy of AAC and state MAC program." Michigan Medicaid currently bases reimbursement on "Actual Acquisition Cost" (AAC), which is the lower of: (1) acquisition cost plus the pharmacy dispensing fee, or (2) the pharmacy's usual and customary charge. Average wholesale price (AWP) is used to screen the usual and customary charge. Michigan substantiated its claim of cost-effectiveness, saying that a 1985 survey based on a 40% sample found that 75% of the state claims were 8% or more below the screens. The state said it plans to refine the AAC and state MACs within the next six months by formally recognizing a unit dose fee, lowering the AWP screens 8% and establishing prior authorization for brand equivalents of MAC drugs.

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