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Executive Summary

The Health Care Financing Administration should set state Medicaid drug expenditure targets based on price comparisons with national and international drug price data, the HHS Inspector General recommends in a draft report, entitled "Strategies to Reduce Medicaid Drug Expenditures." The report recommends that HCFA propose legislation that would "establish specific cost reduction targets based on the comparison of individual state drug prices with national and international drug price data." The IG suggested that this legislation also include a provision that would allow the federal government to reduce its Medicaid contribution to states when they exceed these targets. The report, which outlines several possible approaches to achieving $261 mil. in federal Medicaid drug savings, was sent in early September to HCFA Administrator Wilensky and congressional staffs involved in Medicaid drug discount legislation. To establish state reduction targets, the IG advised HCFA to "take into account actual drug price differences as well as differences in drug utilization patterns." The report also recommends that HCFA provide state Medicaid agencies with different drug price data to "enhance" their ability to negotiate prices. States can achieve these expenditure targets, the IG suggested, through one or more approaches: creating or expanding restrictive drug lists; negotiating with drug manufacturers; or establishing multi-state buying groups to negotiate discounts and rebates on their drug purchases. The latter idea was proposed in Sen. Pryor's (D-Ark.) first Medicaid drug bill. Pryor's latest legislative effort, which is based on ongoing industry price negotiations at the state level, incorporates the idea of requiring negotiated prices. HHS has indicated that it opposes overly restrictive formularies that would require therapeutic substitution. The report also notes that HCFA could establish a MAC (Maximum Allowable Cost) program for single source drugs. The report advises HCFA to "set specific drug price limits for brand name drugs similar to those in place for mult-source drugs." Determinations of "upper limit" prices, the IG suggested, "could be based on the best available U.S. prices or other national or international drug price data." Finally, the IG recommended that HCFA negotiate directly with drug manufacturers for price discounts and rebates. The report suggests that HCFA commence "national Medicaid negotiations to arrive at either a system of rebates and discounts or to arrive at a price limit for brand name drugs." The IG based its recommendations on a study of how Canada controls drug price costs and on a review of several state Medicaid programs. The IG projected that HCFA could reduce Medicaid drug expenditures by a total of $474 mil. annually (including $213 mil. at the state level) "if Medicaid state agencies obtained brand name drugs at the Canadian prices." The report compares U.S. Blue Book drug prices with prices in Canada, where the federal government negotiates prices with manufacturers, and found that -- of 49 drugs analyzed in the study -- "U.S. prices were on average 62% higher...than the average of the prices determined in Canada." Only three drugs -- Trental, Eryc and hydrochlorothiazide -- "were found to be less expensive in the U.S.," the report notes. However, the price differential between Canada and state Medicaid negotiated prices appears to be narrower than the IG found. For example, the IG report lists Merck's Blue Book price for Clinoril 150 mg 100s at $75.66 and the average Canadian price for that product at $42.29 (in U.S. dollars), representing a price difference of 79%. Medi-Cal is paying $58.77 for the same product. In the case of Ciba-Geigy's Lopressor 100 mg 100s, Medi-Cal is now paying less than the Canadian provinces -- $21.49 versus a Canadian average price (in U.S. dollars) of $30.62. Canada, the report explains, ties the "license to market" for new drugs to a negotiated price settlement between the federal government and manufacturers that "typically" is based on price data for the product in seven other countries. "The failure to reach a price agreement can mean the refusal to grant a license to market," the IG report adds. Canadian officials told the IG "that they seek price reductions of at least 25% below the amount paid in the U.S. for the same drug." Canada also has a review board that restrains price increases by tying them to the Consumer Price Index. If a price increase is found to be unjustified, the board can remove patent protection for the drug. According to the IG, Canadian officials also pointed to the existence of formularies at the provincial level as an important factor in price negotiations with manufacturers. The IG report suggests that the five largest U.S. states with restricted formularies -- California, New York, Ohio, Illinois, and Michigan -- paid 22% less in drug costs per recipient in 1988. The IG predicted that the 29 state Medicaid agencies that do not currently maintain a restrictive formulary "would achieve annual savings of $226 mil." if restrictions were adopted similar to those applied by the five states with formularies studied for the report.

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