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Executive Summary

October 1990, prepared by the Office of Senator David Pryor (D-Ark.) Chairman, Special Committee on Aging COVERAGE OF PRESCRIPTION DRUGS States are required to cover all rebated single source drugs and innovator multiple source drugs (when a restrictive prescription has been issued and the drug is subjected to an acceptable rebate). Drugs not providing an acceptable rebate WILL NOT be eligible for Federal matching funds UNLESS the drug is listed as a "1A" drug and the Secretary has approved the state's determination that the drug is "medically necessary." With the exception of a six month period for new drugs after initial FDA approval, all drugs currently on the market can be subject to prior approval. In addition, there are a limited number of drugs that States, at their option, MAY exclude from coverage (see section on permissible drug restrictions and prior approval programs). REBATES TO STATES Manufacturers are required to give the Medicaid program a specific schedule of rebates as a condition of coverage of their prescription drug products. For patented or brandname drug products (single source and innovator multiple source drug products when a restrictive prescription has been issued), there is a "basic rebate" and an "additional rebate" to recover pharmaceutical price increases that are higher than inflation. Calculation of the Basic Rebate Pharmaceutical manufacturers are required to give Medicaid their "best price" in the market, with a maximum of 25% in 1991, and 50% in 1992. The cap phases out for 1993 and thereafter. There is a minimum rebate in 1991 and 1992 of 12-1/2% off AMP and 15% off AMP in 1993 and thereafter. The specific formulas are as follows: For 1991, the basic rebate is the higher of the AMP minus 87.5% of the AMP OR the AMP minus the best price, subject to a cap of 25% of the AMP. (The AMP, the average manufacturers price, is the price that pharmaceutical manufacterers charge wholesalers to purchase the drug.) For 1992, the basic rebate is the higher of the AMP minus 87.5% of the AMP OR the AMP minus the best price, subject to a cap of 50% of the AMP. For 1993 and beyond, the basic rebate is the higher of the AMP minus 85% of the AMP OR the AMP minus the best price. (NOTE: The definition of "best price" excludes Department of Veterans' Affairs depot drug prices and single award contracts AND "nominal" prices, such as those offered to charitable groups or organizations.) Calculation of the Inflation-Adjustment Rebate The "additional rebate" will recover any increase in the average manufacturer prices over the rate of inflation, as measured by the Consumer Price Index-all urban consumers (CPI-U). The AMP for the drug as of 10/1/90 is used as the baseline AMP. For 1991-1993, the additional rebate is calculated by multiplying the number of dosage units of the particular drug dispensed in the state in the quarter times the difference between the average manufacturer's price and the average manufacturer's price as of October 1, 1990, indexed by the CPI-U. For 1994 and beyond, the additional rebate is calculated by comparing, in each state, the current weighted average manufacturers price for a particular manufacturer's product line to weighted average manufacturers price product line as of October 1, 1990. To determine whether use of aggregation in determining the "additional rebate" reduces the amount of rebates to states, the Secretary is charged with using data collected in 1992 and 1993 to compare the amount of the "additional rebate" that will be received by the state under the weighted aggregate formula as compared with the individual drug formula used in the early years. Generic Drugs: For generic drug products (non-innovator multiple source), the rebates will be 10% in 1991-1993, and 11% thereafter. (That is, the average price that the manufacturer charges the wholesaler minus 10% (AMP-10%) for years 1991-1993, and AMP-11% for 1994 and beyond.) Rebate Agreements in Effect: States that had rebate agreements in place with manufacturers prior to enactment are permitted to keep the agreements in effect for the initial term of the agreement if the total aggregate rebates under these agreements equal or exceed 10% of the total aggregate state Medicaid expenditures for that particular company's products in that state. These agreements may continue if savings that are at least as great as the savings achieved under this rebate program are achieved. PROVISIONS RELATING TO MULTIPLE SOURCE DRUGS Except for the two modifications outlined below, the provisions state that current HCFA regulations on the coverage and dispensing of multiple source drugs remain in effect. For innovator multiple source drugs, the language assures the retention of current HCFA regulations that require the dispensing of such a drug when the physician has issued, in his or her own handwriting, a restrictive prescription indicating "brand medically necessary." In instances in which an innovator is dispensed as a result of this restrictive prescription, the manufacturer will be required to give Medicaid the same rebate amount in effect for single source drugs. If the physician does not write medically necessary, the current practice of generic substitution remains intact. Only those generics, however, with the top rating of "A" by the FDA Orange Book can be dispensed to Medicaid patients. A change to the multiple source drug regulations requires the Secretary to implement a federal "look behind" program which would promote the dispensing of generic drug products, where permissible under state law, by reducing federal Medicaid matches for states that do not enforce the "brand medically necessary" provision to block generic substitution. HCFA is also instructed to establish a federal upper limit (FUL) for all multiple source drugs for which there are three or more products rated as therapeutically and pharmaceutically equivalent, and only using the prices for those products that are rated as such. PERMISSIBLE DRUG RESTRICTIONS AND PRIOR APPROVAL PROGRAMS There are several provisions relating to the state's ability to maintain control over the design of their drug programs through prior approval. The only drugs that states are not required to cover are those not subject to rebates and the following list of drugs that many states are currently excluding: those used for anorexia or weight gain; fertility; hair growth or cosmetic purposes; barbituates; smoking cessation; prescription vitamins and minerals, except prenatal vitamins and fluoride preparations; benzodiazepines; drugs sold with associated tests or monitoring services which are available exclusively from the manufacturer; non-prescription (over-the-counter) medications; and cough and cold products. The Secretary will be able to add to this list (by regulation) if state utilization data suggest that such an addition is warranted. States can continue to operate or establish prior approval programs for all drugs and biologicals currently on the market. For new drugs coming on the market, no prior approval restrictions can be used for at least six months. After that period, states can place these drugs on prior approval. To continue to operate (or to establish) a prior approval program after July 1, 1991, states must assure that the physician requester receive a response within 24 hours of making the request. In addition, in an emergency situation in which the physician cannot receive approval for a drug covered under a prior approval program, a prescription of AT LEAST a 72 hours supply must be dispensed. The language also requires the Secretary to study the impact of prior approval programs on beneficiary and provider access to prescription medications, the impact of states developing prior approval restrictions based on costs, and to make recommendations on reforms of prior approval programs, if such are needed. This report is due two years after enactment. DRUG UTILIZATION REVIEW The modified language establishes a program of prospective (pharmacists counseling) and retrospective drug utilization review and an educational outreach program targeted at improving the drug prescribing and dispensing practices of health professionals. The provisions related to counseling ask pharmacists to offer to counsel patients if in their professional judgment the patient would benefit from their doing so. In addition, the content of the counseling provided by pharmacists is up to the pharmacist's professional discretion. The patient counseling guidelines in the bill reflect the national standards adopted by the National Association of Boards of Pharmacy. PHARMACIST REIMBURSEMENT The language prohibits states and the Secretary from altering the pharmacist reimbursement limits for drugs in place (as of 8/1/90) in the states for a period of four years (January 1, 1991-December 31, 1994). In addition, it requires the Secretary to do a study of the adequacy of each state's Medicaid reimbursement rates to pharmacists, including dispensing fees. ELECTRONIC PRESCRIPTION CLAIMS TRANSFER State medical assistance plans are given incentives to develop and implement a cost-saving on-line pharmacy-based electronic system to capture, adjudicate, and reimburse for Medicaid prescription drug claims. The encouragements given to the states is in the form of a 90/10 FFP match. DEMONSTRATION PROJECTS Provides for demonstration projects on: the effectiveness of on-line prospective drug utilization review in assisting pharmacist's fulfilling patient counseling requirements; and, the cost-effectiveness of pharmacists' providing cognitive (clinical) services to patients. EXEMPTIONS Provides for an exemption from Section 1927 for health maintenance organizations and other organizations that contract under Section 1903(m); and, for those hospitals that use formulary systems that bill Medicaid (for outpatient Medicaid prescriptions) no more than their purchase costs for drugs used to fill the prescriptions, as determined by the state Medicaid plan. For the purpose of determining the "best price" in the market for Medicaid discounts, however, prices paid by these institutions for drugs are not exempt. STUDIES Provides for studies on: Level of rebates received by and number of drug manufacturers participating in state Medical assistance program rebate program (annual) Drug Purchasing and Billing Activities of Various Health Care Systems Manufacturer prices for drugs purchased by hospitals, HMOs, and federal government agencies (annual) State prior approval procedures and their impact on beneficiary and provider access to covered outpatient drugs Adequacy of current individual state reimbursement rates to pharmacists Federal and state reimbursement rates and accessibility of vaccines Prudent pharmaceutical purchasing under Medicare outpatient prescription drug programs.

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