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GAO MEETS WITH HMO/HOSPITAL GROUP TO REVIEW REPORT ON OBRA ‘90

Executive Summary

GAO MEETS WITH HMO/HOSPITAL GROUP TO REVIEW REPORT ON OBRA '90 and how the budget law that established the Medicaid outpatient drug rebate program has affected drug prices to hospitals and health maintenance organizations. The General Accounting Office report, released Jan. 15, found that HMO purchasing prices rose 16.7% after OBRA's enactment compared to 8% the year before, and that hospital group purchasing organization prices rose 10%. However, GAO did not tie the enactment of the law directly to the price increases. The Congressional study group said that it "could not determine the extent to which the price increases were attributable to OBRA" ("The Pink Sheet" Jan. 18, p. 3). Members of the Coalition of Providers Concerned with Rising Drug Costs met on Jan. 18 to review the report and then met with GAO Jan. 22. The coalition of large-volume private sector purchasers believes that GAO's findings are consistent with its claims that OBRA, and more specifically the "best price" formula of the Medicaid rebate law, have led to an erosion of the drug discounts previously provided to many HMOs and hospitals. Last year, the hospital and HMO group had cited such price increases in backing legislation to replace Medicaid's "best price" formula with a flat percentage discount for Medicaid ("The Pink Sheet" April 6, 1992, T&G-8). The coalition is asking three general questions about the study: (1) why GAO did not go further in trying to pin down explanation of the widely varying price experiences among the four HMOs and eight hospital group purchasing organizations (GPOs) surveyed for the report; (2) why price data were not cross-checked against information on the expiration of discount drug purchasing contracts; and (3) whether a more complex analysis could be performed on the impact of drug price changes on hospitals and HMO expenditures. On the first issue, GAO found that three of the HMOs experienced post-OBRA drug price increases averaging 10% or less. One HMO, however, experienced a 37% increase. Similarly, while price increases to the GPOs for outpatient drugs averaged 10% overall in the year after OBRA, increases for three of the organizations were 17.3%, 17.7% and 29%, respectively. Based on its knowledge of the organizations that participated in the confidential GAO survey, the coalition believes the HMOs and hospitals with the most severe price increases after OBRA were those that had deeper discount and more tightly managed drug cost control programs. Thus, the disparate inflation rates may indicate which HMOs and hospitals previously had obtained best prices and have lost them since OBRA. Rep. Wyden (D-Ore.) already has asked GAO for a further review to investigate whether drugs with large price increases to private purchasers are those that were previously subject to large "best price" rebates to Medicaid. The coalition notes that GAO does not indicate whether drugs included in the report were purchased through discount contracts and whether the contracts expired or were revised during the study period, although questions on this issue were apparently included in GAO's survey. Again based on its own data from members, the coalition estimates that for drugs purchased through discount contracts, prices rose by 12% to 67% after the pre-OBRA contract expired, while price increases were much smaller for about 10 or so drugs included in the study that were not affected by purchasing contract changes. GAO projected that expenditures for three of the HMOs would increase from 5.8% to 13.4% as a result of drug price raises and expenditures for three of the GPOs would increase from 0.9% to 18.2%. The coalition is concerned that the projections assume that utilization did not change as a result of price increases and did not take into account measures taken to help counter the price increases, such as buying up large quantities of drugs under a soon-to-expire discount contract and warehousing them for future use.
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