Medicaid Drug Rebate Program
Inadequate Oversight Raises Concerns about Rebates Paid to States Gao ID: GAO-05-102 February 4, 2005To help control Medicaid spending on drugs, states receive rebates from pharmaceutical manufacturers through the Medicaid drug rebate program. Rebates are based on two prices--best price and average manufacturer price (AMP)--reported by manufacturers. Both reflect manufacturers' prices to various entities, accounting for certain financial concessions like discounts. Concerns have been raised about rising Medicaid drug spending. GAO studied (1) federal oversight of manufacturer-reported best prices and AMPs and the methods used to determine them, (2) how manufacturers' determinations of those prices could have affected rebates, and (3) how the rebate program reflects financial concessions in the private market.
Current rebate program oversight does not ensure that manufacturer-reported prices or price determination methods are consistent with program criteria specified in the rebate statute, rebate agreement, and Centers for Medicare & Medicaid Services (CMS) program memoranda. In administering the program, CMS conducts only limited checks for reporting errors in manufacturer-reported drug prices. In addition, CMS only reviews the price determination methods when manufacturers request recalculations of prior rebates. In four reports issued from 1992 to 2001, the Department of Health and Human Services' (HHS) Office of Inspector General (OIG) identified several factors that limited its ability to verify the accuracy of drug prices reported by manufacturers, including a lack of clear guidance on how AMP should be calculated. In some cases, OIG found problems with manufacturers' price determination methods and reported prices. However, CMS has not followed up with manufacturers to make sure that the identified problems with prices and methods have been resolved. There was considerable variation in the methods that manufacturers used to determine best price and AMP, and some methods could have reduced the rebates state Medicaid programs received. Manufacturers are allowed to make assumptions when determining best price and AMP, as long as they are consistent with the law and the rebate agreement. The assumptions often involve the treatment of discounts and other price reductions in best price and AMP. Some manufacturers combined price reductions associated with particular sales in their price determination methods, while others accounted for the reductions separately. Separate treatment of the reductions resulted in rebates to states that in some cases were lower than they would have been had the reductions been considered together. Some manufacturers made assumptions that diverged from the rebate agreement and CMS program memoranda that could have raised rebates. States could have to repay any excess rebates if manufacturers revise their assumptions and request recalculations of prior rebates. The rebates that manufacturers pay to states are based on prices and financial concessions manufacturers make available to entities that purchase their drugs but may not reflect certain financial concessions they offer to other entities. In particular, the rebate program does not clearly address certain manufacturer payments that are negotiated by pharmacy benefit managers (PBM) on behalf of third-party payers such as employer-sponsored health plans and other health insurers. These types of financial arrangements are relatively new to the market. CMS's guidance to manufacturers has not clearly stated how manufacturers should treat these payments in their determinations of best price and AMP. Within the current structure of the rebate formula, additional guidance on how to account for these payments to PBMs could affect the rebates paid to states, although whether rebates would increase or decrease as a result, and by how much, is uncertain.
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Director: Team: Phone:GAO-05-102, Medicaid Drug Rebate Program: Inadequate Oversight Raises Concerns about Rebates Paid to States
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Report to Congressional Requesters:
United States Government Accountability Office:
GAO:
February 2005:
Medicaid Drug Rebate Program:
Inadequate Oversight Raises Concerns about Rebates Paid to States:
GAO-05-102:
GAO Highlights:
Highlights of GAO-05-102, a report to congressional requesters
Why GAO Did This Study:
To help control Medicaid spending on drugs, states receive rebates from
pharmaceutical manufacturers through the Medicaid drug rebate program.
Rebates are based on two prices–best price and average manufacturer
price (AMP)–reported by manufacturers. Both reflect manufacturers‘
prices to various entities, accounting for certain financial
concessions like discounts.
Concerns have been raised about rising Medicaid drug spending. GAO
studied (1) federal oversight of manufacturer-reported best prices and
AMPs and the methods used to determine them, (2) how manufacturers‘
determinations of those prices could have affected rebates, and (3) how
the rebate program reflects financial concessions in the private market.
What GAO Found:
Current rebate program oversight does not ensure that manufacturer-
reported prices or price determination methods are consistent with
program criteria specified in the rebate statute, rebate agreement, and
Centers for Medicare & Medicaid Services (CMS) program memoranda. In
administering the program, CMS conducts only limited checks for
reporting errors in manufacturer-reported drug prices. In addition, CMS
only reviews the price determination methods when manufacturers request
recalculations of prior rebates. In four reports issued from 1992 to
2001, the Department of Health and Human Services‘ (HHS) Office of
Inspector General (OIG) identified several factors that limited its
ability to verify the accuracy of drug prices reported by
manufacturers, including a lack of clear guidance on how AMP should be
calculated. In some cases, OIG found problems with manufacturers‘ price
determination methods and reported prices. However, CMS has not
followed up with manufacturers to make sure that the identified
problems with prices and methods have been resolved.
There was considerable variation in the methods that manufacturers used
to determine best price and AMP, and some methods could have reduced
the rebates state Medicaid programs received. Manufacturers are allowed
to make assumptions when determining best price and AMP, as long as
they are consistent with the law and the rebate agreement. The
assumptions often involve the treatment of discounts and other price
reductions in best price and AMP. Some manufacturers combined price
reductions associated with particular sales in their price
determination methods, while others accounted for the reductions
separately. Separate treatment of the reductions resulted in rebates to
states that in some cases were lower than they would have been had the
reductions been considered together. Some manufacturers made
assumptions that diverged from the rebate agreement and CMS program
memoranda that could have raised rebates. States could have to repay
any excess rebates if manufacturers revise their assumptions and
request recalculations of prior rebates.
The rebates that manufacturers pay to states are based on prices and
financial concessions manufacturers make available to entities that
purchase their drugs but may not reflect certain financial concessions
they offer to other entities. In particular, the rebate program does
not clearly address certain manufacturer payments that are negotiated
by pharmacy benefit managers (PBM) on behalf of third-party payers such
as employer-sponsored health plans and other health insurers. These
types of financial arrangements are relatively new to the market. CMS‘s
guidance to manufacturers has not clearly stated how manufacturers
should treat these payments in their determinations of best price and
AMP. Within the current structure of the rebate formula, additional
guidance on how to account for these payments to PBMs could affect the
rebates paid to states, although whether rebates would increase or
decrease as a result, and by how much, is uncertain.
What GAO Recommends:
GAO recommends that CMS issue clear, updated guidance on manufacturer
price determination methods and price definitions. It also recommends
that CMS implement systematic oversight of manufacturer methods and a
plan to ensure the accuracy of reported prices and rebates to states.
HHS agreed with the importance of guidance to manufacturers but did not
agree that the program had received inadequate oversight. GAO
acknowledges HHS oversight actions but does not believe they ensure
accurate rebates to states.
www.gao.gov/cgi-bin/getrpt?GAO-05-102.
To view the full product, including the scope and methodology, click on
the link above. For more information, contact Marjorie Kanof at (202)
512-7114.
[End of section]
Contents:
Letter:
Results in Brief:
Background:
Current Program Oversight Does Not Ensure That Manufacturer-Reported
Prices or Price Determination Methods Are Consistent with Program
Criteria:
Manufacturer Price Determination Methods Varied: Some Could Have Led to
Lower Rebates:
Rebate Program Does Not Clearly Address Certain Financial Concessions
Negotiated by PBMs:
Conclusions:
Recommendations for Executive Action:
Agency and Industry Comments and Our Response:
Appendix I: Comments from the Department of Health and Human Services:
Appendix II: GAO Contact and Staff Acknowledgments:
GAO Contact:
Acknowledgments:
Figure:
Figure 1: Example of How Prompt Payment Discounts in Chargeback
Situations Affect the Net Amount Realized by a Manufacturer:
Abbreviations:
AMP: average manufacturer price:
CMS: Centers for Medicare & Medicaid Services:
DOJ: Department of Justice:
HHS: Department of Health and Human Services:
HMO: health maintenance organization:
OIG: Office of Inspector General:
PBM: pharmacy benefit manager:
United States Government Accountability Office:
Washington, DC 20548:
February 4, 2005:
The Honorable Henry A. Waxman:
Ranking Minority Member:
Committee on Government Reform:
House of Representatives:
The Honorable Charles E. Grassley:
Chairman:
Committee on Finance:
United States Senate:
Prescription drug spending accounts for a substantial and growing share
of state Medicaid program outlays.[Footnote 1] The Omnibus Budget
Reconciliation Act of 1990 established the Medicaid drug rebate
program[Footnote 2] to help control Medicaid drug spending. Under the
rebate program, pharmaceutical manufacturers pay rebates to states as a
condition for the federal contribution to Medicaid spending for the
manufacturers' outpatient prescription drugs. In fiscal year 2002,
Medicaid drug expenditures were $29.3 billion out of $258.2 billion in
total Medicaid spending;[Footnote 3] under the rebate program,
manufacturers paid rebates to states of about $5.6 billion for covered
outpatient drugs.[Footnote 4] In recent years, concerns have been
raised about increasing Medicaid spending on prescription drugs.
Medicaid drug spending increased at an annual average rate of 19
percent from fiscal year 2000 to 2002, while Medicaid spending as a
whole grew 12 percent annually during that period.[Footnote 5]
Medicaid rebates for brand name outpatient drugs are calculated with
two prices that participating manufacturers must report to the federal
government for each drug: the "best price" and the "average
manufacturer price" (AMP). Best price and AMP represent prices that are
available from manufacturers to entities that purchase their drugs.
Best price for a drug is the lowest price available from the
manufacturer to any purchaser, with some exceptions. AMP for a drug is
the average price paid to a manufacturer by wholesalers for drugs
distributed to the retail pharmacy class of trade. Both best price and
AMP must reflect certain financial concessions, such as discounts, that
are available to drug purchasers. The basic Medicaid rebate for a brand
name drug equals the number of units of the drug paid for by the state
Medicaid program multiplied by the basic "unit rebate amount" for the
drug, which is either the difference between best price and AMP, or
15.1 percent of AMP, whichever is greater.[Footnote 6] The closer best
price is to AMP, the more likely the rebate will be based on 15.1
percent of AMP--the minimum rebate amount.
The Centers for Medicare & Medicaid Services (CMS),[Footnote 7] an
agency of the Department of Health and Human Services (HHS),
administers and oversees the rebate program, entering into rebate
agreements with manufacturers,[Footnote 8] collecting and reviewing
manufacturer-reported best prices and AMPs, and providing ongoing
guidance to manufacturers and states on the program. The Secretary of
Health and Human Services, by law, may verify manufacturer-reported
prices and has delegated that authority to HHS's Office of Inspector
General (OIG). OIG regularly conducts audits, evaluations, and
investigations pertaining to HHS programs.
Recent litigation has highlighted the importance of the accuracy of
prices manufacturers report to CMS and the rebates they pay to states.
Since 2002, several manufacturers have agreed to make payments to
settle allegations that they underpaid rebates to states by reporting
inaccurate prices.[Footnote 9]
You asked us to study the Medicaid drug rebate program. We are
reporting on (1) federal oversight of manufacturer-reported best prices
and AMPs and the methods manufacturers used to determine those prices,
(2) how manufacturers' methods of determining best price and AMP could
have affected the rebates they paid to state Medicaid programs, and (3)
how the rebate program reflects financial concessions available in the
private market.
To report on the oversight of manufacturer-reported prices and methods,
we reviewed the rebate statute, the standard rebate agreement, CMS
program memoranda, and OIG reports on the rebate program. We also
interviewed officials from CMS and OIG. To assess how manufacturers'
price determination methods could have affected rebate amounts, we
reviewed the pricing methodologies for the 13 manufacturers that
accounted for the highest Medicaid expenditures in the last two
quarters of 2000. We compared manufacturers' methods of determining
best price and AMP to the rebate statute, rebate agreement, and
relevant CMS program memoranda. In addition, we examined sales
transaction data provided by these manufacturers. We received data for
the 10 brand name drugs that produced the highest Medicaid expenditures
for the last two quarters of 2000 for each manufacturer, as well as
data for 5 additional frequently prescribed brand name drugs--135 drugs
in total. We examined the sales transaction data to understand how
manufacturers implemented their price determination methods and to
calculate the impact of manufacturer practices on rebates. Because we
purposely selected manufacturers and drugs that accounted for a large
share of Medicaid drug spending, the results of our analysis cannot be
generalized. To examine how the rebate program reflects financial
concessions available in the private market, we reviewed the rebate
statute, the standard rebate agreement, and CMS program memoranda;
market literature; and recent financial statements of three large
pharmacy benefit managers (PBM), which manage prescription drug
benefits for third-party payers.
We determined that the manufacturers' sales transaction data were
sufficiently reliable for the purposes of this report. To assess the
reliability of the data, we (1) confirmed that the data included the
elements we requested and were consistent with provided documentation;
(2) reviewed related documentation, including each manufacturer's price
determination methods; and (3) worked with individual manufacturers'
Medicaid drug rebate program personnel to identify any data problems.
We also compared the prices we calculated from the sales transaction
data to the prices manufacturers reported to CMS for the relevant
quarter. It was not feasible to compare the reported sales transaction
data with their source documentation, such as invoices, because of the
large volume of sales transactions associated with the drugs in our
sample. We do not report data in a manner that would allow the
identification of a specific manufacturer or drug. We performed our
work from December 2003 through January 2005, in accordance with
generally accepted government auditing standards.
Results in Brief:
Current rebate program oversight does not ensure that manufacturer-
reported prices or price determination methods are consistent with
program criteria as specified in the rebate statute, rebate agreement,
and CMS program memoranda. CMS conducts only limited checks for
reporting errors in manufacturer-reported drug prices. Furthermore, the
agency does not generally review the methods and underlying assumptions
that manufacturers use to determine best price and AMP. Rather, CMS
reviews manufacturers' price determination methods only when they
request recalculations of prior rebates. In four reports issued from
1992 to 2001, OIG stated that its review efforts were hampered by
unclear CMS guidance on how manufacturers were to determine AMP, by a
lack of manufacturer documentation, or by both. In some cases, OIG
found problems with manufacturers' price determination methods and
reported prices. However, CMS has not followed up with manufacturers to
make sure that the identified problems with prices and price
determination methods have been resolved.
There was considerable variation in the methods that manufacturers used
to determine best price and AMP, and some methods could have reduced
rebates to state Medicaid programs. Manufacturers are allowed to make
reasonable assumptions when determining best price and AMP, as long as
those assumptions are consistent with the law and the rebate agreement.
The assumptions often pertain to the transactions, including discounts
and other price reductions, that are considered when determining best
price and AMP. In determining best price and AMP, some manufacturers
did not combine the price reductions associated with certain
transactions involving prompt payment discounts. This resulted in
rebates to states that in some cases were lower than they would have
been had these manufacturers combined such price reductions as other
manufacturers did. In addition, some manufacturers made assumptions
that diverged from the rebate agreement and CMS program memoranda that
could have raised rebates. States may have to repay any excess rebates
if manufacturers later revise their assumptions and request
recalculations of prior rebates.
The rebates that manufacturers pay to states are based on a range of
prices and financial concessions that they make available to entities
that purchase their drugs but may not reflect certain financial
concessions they offer to other entities in today's complex market. In
particular, the rebate program does not clearly address certain
manufacturer payments that are negotiated by PBMs on behalf of third-
party payers such as employer-sponsored health plans and other health
insurers. These types of financial arrangements are a relatively new
development in the market. CMS's guidance to manufacturers has not
clearly stated how manufacturers should treat these payments in their
determinations of best price and AMP. Within the current structure of
the rebate formula, additional CMS guidance on how to account for these
payments to PBMs could affect the rebates paid to states, although
whether rebates would increase or decrease as a result, and by how
much, is uncertain.
To help ensure that the Medicaid drug rebate program is achieving its
objective of controlling states' Medicaid drug spending, we recommend
that the Administrator of CMS issue clear guidance on manufacturer
price determination methods and the definitions of best price and AMP,
and update such guidance as additional issues arise. We also recommend
that the Administrator implement, in consultation with OIG, systematic
oversight of the price determination methods employed by pharmaceutical
manufacturers and a plan to ensure the accuracy of manufacturer-
reported prices and rebates to states.
In its comments on a draft of this report, HHS agreed with the
importance of guidance to manufacturers, but disagreed with our
conclusion that there has been inadequate program oversight. While the
draft report cited oversight activities HHS has undertaken, we believe
that its oversight does not adequately ensure the accuracy of
manufacturer-reported prices and rebates paid to states. The
manufacturers that supplied data for this report reviewed sections of
the draft report and provided oral comments. Some of the manufacturers
raised concerns about our discussion of certain methods they used to
determine rebates. In response to the manufacturers' concerns, we
clarified our discussion of manufacturers' price determination methods.
Background:
The Medicaid drug rebate program provides savings to state Medicaid
programs through rebates for outpatient prescription drugs that are
based on two prices per drug that manufacturers report to CMS: best
price and AMP. These manufacturer-reported prices are based on the
prices that manufacturers receive for their drugs in the private market
and are required to reflect certain financial concessions such as
discounts.
Features of the Private Pharmaceutical Market:
Pharmaceutical manufacturers sell their products directly to a variety
of purchasers, including wholesalers, retailers such as chain
pharmacies, and health care providers such as hospitals that dispense
drugs directly to patients. The prices that manufacturers charge vary
across purchasers. The private market also includes PBMs, which manage
prescription drug benefits for third-party payers such as employer-
sponsored health plans and other health insurers.[Footnote 10] PBMs may
negotiate payments from manufacturers to help reduce third-party
payers' costs for prescription drugs; those payments may be based on
the volume of drugs purchased by the payers' enrollees. PBMs also may
operate mail-order pharmacies, purchasing drugs from manufacturers and
delivering them to their clients' enrollees.
The amount a manufacturer actually realizes for a drug is not always
the same as the price that is paid to the manufacturer at the time of
sale. Manufacturers may offer purchasers rebates or discounts that may
be realized after the initial sale, such as those based on the volume
of drugs the purchasers buy during a specified period or the timeliness
of their payment. In some cases, purchasers negotiate a price with the
manufacturer that is below what a wholesaler pays the manufacturer for
a given drug. In such a circumstance, a wholesaler may sell the drug to
the purchaser at the lower negotiated price and then request from the
manufacturer a "chargeback"--the difference between the price the
wholesaler paid for the drug and the purchaser's negotiated price.
The Medicaid Drug Rebate Program:
The statute governing the Medicaid drug rebate program and the standard
rebate agreement that CMS signs with each manufacturer define best
price and AMP and specify how those prices are to be used to determine
the rebates due to states. In the absence of program
regulations,[Footnote 11] CMS has issued program memoranda[Footnote 12]
in order to provide further guidance to manufacturers regarding how to
determine best price and AMP, some of which were in response to
questions that arose regarding the methods that manufacturers were
using to determine those prices.[Footnote 13] The rebate agreement
states that in the absence of specific guidance on the determination of
best price and AMP, manufacturers may make "reasonable assumptions" as
long as those assumptions are consistent with the "intent" of the law,
regulations, and the rebate agreement.[Footnote 14] As a result, price
determination methods may vary across manufacturers, particularly with
respect to which transactions they consider when determining best price
and AMP.
Under the rebate statute, best price is the lowest price available from
the manufacturer to any wholesaler, retailer, provider, health
maintenance organization (HMO), or nonprofit or government entity, with
some exceptions.[Footnote 15] Best price is required to be reduced to
account for cash discounts, free goods that are contingent on purchase
requirements, volume discounts and rebates (other than rebates under
this program), as well as--according to the rebate agreement and a CMS
program memorandum--cumulative discounts and any other arrangements
that subsequently adjust the price actually realized. Prices charged to
certain federal purchasers,[Footnote 16] eligible state pharmaceutical
assistance programs and state-run nursing homes for veterans, and
certain health care facilities--including those in underserved areas or
serving poorer populations--are not considered when determining best
price. Prices available under endorsed Medicare discount card programs,
as well as those negotiated by Medicare prescription drug plans or
certain retiree prescription drug plans, are similarly excluded from
best price. Nominal prices--prices that are less than 10 percent of
AMP--also are excluded from best price.
AMP is defined by statute as the average price paid to a manufacturer
for the drug by wholesalers for drugs distributed to the retail
pharmacy class of trade.[Footnote 17] The transactions used to
calculate AMP are to reflect cash discounts and other reductions in the
actual price paid, as well as any other price adjustments that affect
the price actually realized, according to the rebate agreement and a
CMS program memorandum.[Footnote 18] Under the rebate agreement, AMP
does not include prices to government purchasers based on the Federal
Supply Schedule, prices from direct sales to hospitals or HMOs, or
prices to wholesalers when they relabel drugs they purchase under their
own label.
The relationship between best price and AMP determines the unit rebate
amount and, thus, the size of the rebate that states receive for a
brand name drug. The basic unit rebate amount is the larger of two
values: the difference between best price and AMP, or 15.1 percent of
AMP.[Footnote 19] The closer best price is to AMP, the more likely the
rebate for a drug will be based on the minimum amount--15.1 percent of
AMP--rather than the difference between the two values. A state's
rebate for a drug is the product of the unit rebate amount and the
number of units of the drug paid for by the state's Medicaid program.
In 2000, rebates were based on the minimum amount for about half of the
brand name drugs covered under the rebate program; for the remaining
drugs, rebates were based on the difference between best price and AMP.
Manufacturers pay rebates to states on a quarterly basis. They are
required to report best price and AMP for each drug to CMS within 30
days of the end of each calendar quarter. Once CMS receives this
information, the agency uses the rebate formula to calculate the unit
rebate amount for the smallest unit of each drug, such as a tablet,
capsule, or ounce of liquid. CMS then provides the unit rebate amount
to the states. Each state determines its Medicaid utilization for each
covered drug--as measured by the total number of the smallest units of
each dosage form, strength, and package size the state paid for in the
quarter--and reports this information to the manufacturer within 60
days of the end of the quarter. The manufacturer then must compute and
pay the rebate amount to each state within 30 days of receiving the
utilization information.
Manufacturers are required to report price adjustments to CMS when
there is a change in the prices they reported for a prior quarter.
These adjustments may result from rebates, discounts, or other price
changes that occur after the manufacturers submit prices to CMS.
Manufacturers also may request that CMS recalculate the unit rebate
amounts using revised prices if they determine that their initially
reported prices were incorrect due to, for example, improper inclusion
or exclusion of certain transactions. In 2003, CMS issued a final rule
that, effective January 1, 2004, limits the time for manufacturers to
report any price adjustments to 3 years after the quarter for which the
original price was reported.[Footnote 20]
Current Program Oversight Does Not Ensure That Manufacturer-Reported
Prices or Price Determination Methods Are Consistent with Program
Criteria:
The minimal oversight by CMS and OIG of manufacturer-reported prices
and price determination methods does not ensure that those prices or
methods are consistent with program criteria, as specified in the
rebate statute, rebate agreement, and CMS program memoranda. CMS
conducts limited reviews of prices and only reviews price determination
methods when manufacturers request recalculations of prior rebates. OIG
has issued four reports on audits of manufacturer-reported prices since
the program's inception in 1991. OIG reported that, in the course of
its work, its efforts were hampered both by unclear CMS guidance on
determining AMP and by a lack of manufacturer documentation. In some
instances, OIG found problems with manufacturers' price determination
methods and reported prices. However, CMS has not followed up with
manufacturers to make sure that the identified problems with prices and
price determination methods have been resolved.
CMS's Review of Manufacturer-Reported Prices Is Limited:
As part of the agency's administration of the Medicaid drug rebate
program, CMS reviews drug prices submitted by approximately 550
manufacturers that participate in the program. Each quarter, CMS
conducts automated data edit checks on the best prices and AMPs for
about 25,000 drugs to identify reporting errors. These checks are
intended to allow CMS to make sure all drugs for which manufacturers
report prices are in its database of Medicaid-covered drugs and to
ensure that those prices are submitted in the correct format. The
agency's automated data checks also are intended to ensure that the
correct price is used when there are multiple prices for the same drug.
When data checks indicate a potential reporting error, CMS sends an
edit report to the manufacturer asking for corrected drug prices.
However, CMS does not have a mechanism in place to track whether, in
fact, manufacturers submit corrected prices.
CMS sometimes identifies other price reporting errors when it
calculates the unit rebate amount for a drug, but the agency does not
follow up with manufacturers to verify that errors have been corrected.
CMS will notify a manufacturer of any missing price data for drugs in
its database or any large deviations from previous unit rebate amounts.
For example, CMS would send a report to a manufacturer that had a unit
rebate amount for a drug that deviated from that of the prior quarter
by more than 50 percent. It would be up to that manufacturer to
indicate whether or not the underlying reported prices were, in fact,
correct. If a manufacturer determined that there were problems with the
reported price for a drug--such as incorrect unit pricing or
typographical errors like misplaced decimals--it would send corrected
data to CMS prior to or with future price submissions. In this
situation, the manufacturer also would recalculate the unit rebate
amount and, once invoiced by the states with total utilization for the
drug paid for by Medicaid, would send the rebate payment to those
states based on the recalculated unit rebate amount. If a manufacturer
did not send revised pricing data to CMS, then the unit rebate amount
would remain the same. In 2000, CMS generated approximately 150 reports
detailing these 50 percent deviations, according to an agency official.
The agency did not track how many unit rebate amounts were changed as a
result or any effect on rebates.
Price Determination Methods Are Reviewed Only When Manufacturers
Request Recalculations:
CMS does not generally review the methods and underlying assumptions
that manufacturers use to determine best price and AMP, even though
these methods and assumptions can have a substantial effect on rebates.
While the rebate agreement requires manufacturers to maintain
documentation of the assumptions underlying their price determination
methods, CMS does not verify that such documentation is kept and rarely
requests it. Furthermore, CMS does not generally check to ensure that
manufacturers' assumptions and price determination methods are
consistent with the rebate statute and rebate agreement.
CMS reviews the methodologies employed to determine best price and AMP
only when manufacturers request recalculations of prior rebates. A
manufacturer may request a recalculation of a prior rebate any time it
changes the methods it uses to determine best price or AMP.[Footnote
21] CMS requires the manufacturer to submit both its original and its
revised methods for determining those prices when requesting a
recalculation of prior rebates, so that it can evaluate whether the
revised methods are consistent with the rebate statute, rebate
agreement, and program memoranda. Six approved recalculations, for
which we could obtain data,[Footnote 22] reduced prior rebates to
states by a total of more than $220 million.[Footnote 23] An additional
approved recalculation required the manufacturer to pay states an
additional $388,000.
OIG Reports That Its Efforts Have Been Limited by Unclear Program
Guidance:
OIG has issued four reports on audits of manufacturer-reported prices
since the program's inception in 1991. Three of the four OIG reports
documented limitations to OIG's ability to verify drug prices. OIG
reported that its efforts were hampered by unclear CMS guidance on
determining AMP, by a lack of manufacturer documentation, or by both.
In particular, OIG found that a lack of specificity on how the "retail
pharmacy class of trade" was defined limited its efforts to verify AMP.
Both the rebate statute and rebate agreement define AMP as the average
price paid by wholesalers for drugs distributed to the retail pharmacy
class of trade, with some exceptions. OIG officials told us that
program memoranda issued by CMS have not provided sufficient guidance
on AMP to allow OIG to audit manufacturers' methods for determining
AMP. Despite these limitations, in some instances OIG was able to
identify some problems with the accuracy of manufacturers' reported
prices; however, CMS has not followed up with manufacturers to make
sure that these problems with prices and price determination methods
have been resolved.
In its first review of manufacturer-reported prices in 1992, OIG found
that it could not verify the AMPs reported by the four manufacturers it
reviewed.[Footnote 24] OIG found it could not evaluate the methods
these manufacturers used to determine AMP because neither the rebate
statute nor CMS had provided sufficiently detailed instructions on
methods for calculating AMP. OIG therefore advised CMS that it planned
no future AMP data audits until CMS developed a specific written policy
on how AMP was to be calculated. CMS disagreed, saying that the rebate
statute and rebate agreement had already established a methodology for
computing AMP, and stressed that this methodology was clarified, at
manufacturer request, on an as-needed basis through conversations with
individual manufacturers.[Footnote 25]
In its second review of manufacturer-reported prices, OIG, in 1995,
attempted to verify one manufacturer's recalculation request. While the
OIG reported that it could not complete its analysis because of
inadequate manufacturer documentation,[Footnote 26] it was able to
identify some manufacturer errors in determining AMP. In its review,
OIG found that the manufacturer had miscalculated its revised AMP
because it included "free goods" specifically excluded in the rebate
agreement, miscalculated cash discounts, and improperly included sales
rebates applicable to a period other than the quarter being audited.
OIG recommended that CMS have the manufacturer revise its AMP data.
Although CMS agreed with OIG's recommendations, as of October 2004, it
had not required any such revision of the audited manufacturer's AMP
determinations.
In its third review, conducted in 1997, OIG attempted to review a
manufacturer's recalculation request but again reported that it was
unable to complete its evaluation because of a lack of specific
guidance on determining AMP and a lack of manufacturer documentation
supporting its revised AMP. In the absence of guidance from CMS, OIG
defined retail pharmacy class of trade for this audit to include only
independent and chain pharmacies that sold drugs directly to the
public. Therefore, OIG recommended that CMS ask the manufacturer to
exclude from the calculation of AMP transactions that OIG determined
were to nonretail entities such as mail-order pharmacies, nursing home
pharmacies, independent practice associations, and clinics. OIG also
found that the manufacturer used a flawed methodology to identify
certain sales that it had included in the retail class of trade, and
thus AMP. As a result, OIG recommended that CMS ask the manufacturer to
exclude those sales from AMP unless the manufacturer could provide
additional documentation to support the inclusion of those sales in
AMP. Although CMS did not agree with OIG's definition of retail
pharmacy class of trade, CMS concurred with OIG's recommendation to ask
the manufacturer to recalculate AMP.[Footnote 27] As of October 2004,
CMS had not required any revision of this manufacturer's AMP
determinations.
In its fourth review of manufacturer-reported prices issued in 2001,
OIG investigated how manufacturers were treating repackagers--entities
such as HMOs that repackage or relabel drugs under their own names--in
their best price determinations. The work followed up on previous work
OIG conducted in response to a congressional inquiry in 1999. The
rebate statute states that HMO sales are required to be included in
best price determinations. CMS's June 1997 program memorandum stated
that sales to other manufacturers that repackage the drugs are to be
excluded from best price determinations. However, the rebate statute,
rebate agreement, and CMS program memoranda did not address how HMOs
should be treated when they act as repackagers. In a letter issued in
response to the 1999 congressional request, OIG reported that excluding
drug sales to two HMOs that acted as repackagers from best price
determinations lowered state rebate amounts by $27.8 million in fiscal
year 1998.[Footnote 28] In July 2000, CMS issued an additional program
memorandum to manufacturers stating that sales to an HMO should be
considered in best price determinations regardless of whether the HMO
was a repackager.[Footnote 29] In 2001, OIG issued its fourth review,
reporting that states lost $80.7 million in rebates in fiscal year 1999
due to improperly excluded drug sales to HMO repackagers.[Footnote 30]
In September 2004, a CMS official told us that CMS planned to release a
program memorandum instructing manufacturers to revise prior rebates
for which they had excluded sales to HMOs from best price. However, CMS
does not have a mechanism in place to track that manufacturers have
made these rebate adjustments and therefore cannot verify that
manufacturers have made or will make these adjustments.
OIG officials told us that, despite the program releases issued by CMS,
they remain unable to evaluate AMP because of the lack of clear CMS
guidance, particularly related to the retail pharmacy class of trade
and treatment of PBM transactions. In October 2004, OIG officials told
us that they were working with CMS to review four manufacturers'
recalculation requests and as part of this work were evaluating the
methods manufacturers have used to determine prices. OIG officials also
told us that they may conduct additional audits because of the number
of recent manufacturer recalculation requests--18 requests received
between September and December of 2003--and the significant financial
impact the potential rebate adjustments would have on state Medicaid
programs. However, in light of OIG's remaining concerns about CMS
guidance, OIG officials told us that their current audits--and any
future audits--likely would be limited to descriptions of how inclusion
and exclusion of certain sales in price determinations would affect
rebates.
Manufacturer Price Determination Methods Varied: Some Could Have Led to
Lower Rebates:
We found considerable variation in the methods that manufacturers used
to determine best price and AMP. Manufacturers are allowed to make
reasonable assumptions when determining best price and AMP, as long as
those assumptions are consistent with the law and the rebate agreement.
The assumptions often pertain to the transactions, including discounts
or other price reductions, that are considered in determining best
price and AMP. We found that in some cases manufacturers' assumptions
could have led to lower rebates and in other cases to higher rebates.
Manufacturers can later revise their assumptions and request
recalculations of previously paid rebates, which can result in states
repaying any excess rebates.
We found that manufacturers made varying assumptions about which sales
to include and exclude from their calculations of AMP. For example,
some included sales to a broad range of facilities in AMP, excluding
only transactions involving facilities explicitly excluded by the law,
rebate agreement, or CMS program memoranda. In contrast, others
included sales to a narrower range of purchasers--only those purchasers
explicitly included in AMP by the law, rebate agreement, or CMS program
memoranda. Manufacturers also differed in how they treated certain
types of health care providers that are not explicitly addressed by the
law, rebate agreement, or CMS program memoranda. For example, some
manufacturers included sales to physician groups in AMP, while others
did not. These assumptions can affect the reported prices and, in turn,
the size of rebates paid to states.
Some manufacturers did not account for certain "administrative fees"
paid to PBMs when determining best price or AMP. The statute and rebate
agreement require that best price incorporate volume-based discounts.
Further, according to the rebate agreement and a CMS program
memorandum, both best price and AMP are to account for cumulative
discounts or other arrangements that subsequently adjust the prices
actually realized.[Footnote 31] While CMS has acknowledged that not all
PBM arrangements will affect best price and AMP, the agency has advised
manufacturers that administrative fees, incentives, promotional fees
and chargebacks, as well as all discounts and rebates provided to
purchasers, should be considered in determinations of best price and
AMP when they are associated with sales that are to be considered in
those prices.[Footnote 32] When a PBM acts as a mail-order pharmacy and
takes possession of drugs, it is a purchaser. We found that while the
basis for the administrative fees paid to PBMs varied among the
manufacturers we reviewed, the fees often were based on a utilization
measure, such as the sales volume of drugs used by the enrollees of the
PBM's clients. To the extent that PBMs' purchases for their mail-order
pharmacies contributed to the utilization measures used to determine
their administrative fees, the fees for the mail-order portion of their
business resemble a volume-based discount that adjusts the price
actually realized. Some manufacturers told us that they accounted for
the portion of administrative fees paid to PBMs associated with the
PBMs' mail-order pharmacies in their determinations of best price or
AMP. In contrast, others said they did not incorporate this portion of
any administrative fees paid to PBMs in either best price or AMP. Some
of those manufacturers characterized these fees as payments for
services rather than adjustments to prices.
Excluding administrative fees from the determination of best price or
AMP could have reduced rebates below what they would have been had the
manufacturers included them when determining those prices. For one
manufacturer, for example, if administrative fees paid to PBMs
associated with their mail-order pharmacy purchases had been included
in the manufacturer's determination of best price and AMP, rebates for
11 drugs would have been up to 16 percent higher in the third quarter
of 2000 and up to 12 percent higher in the fourth quarter of 2000. The
ultimate impact on rebates to states depends on how many manufacturers
excluded these fees from reported prices, the volume of those
manufacturers' sales to PBM mail-order pharmacies, as well as the
prices and utilization of the relevant drugs.
Manufacturers also differed in how they accounted for certain
transactions involving prompt payment discounts. Both the rebate
agreement and an applicable CMS program memorandum specify that best
price and AMP are to reflect cumulative discounts or other arrangements
that subsequently adjust the prices actually realized. In examining
manufacturers' practices, we found that they generally provided a
prompt payment discount of 2 percent of the purchase price to
wholesalers and others that purchased drugs from them directly, when
they paid within a specified period. In most cases, when the
manufacturers we reviewed sold a drug directly to a purchaser, they
reduced the purchaser's price by any applicable prompt payment discount
when determining best price and AMP. When the transaction also involved
a chargeback arrangement, manufacturers' methods differed. A chargeback
involves one drug passing from a manufacturer through a wholesaler to a
purchaser, so the chargeback amount and the prompt payment discount
together affect the amount the manufacturer actually realizes for the
drug. (See fig. 1.) Some manufacturers calculated the net price as
their price to the wholesaler, reduced by both the prompt payment
discount and the chargeback amount for those drugs, when determining
best price and AMP. Other manufacturers, however, considered any prompt
payment discount given to the wholesaler separately from any chargeback
amount and thus did not incorporate the effect of both price reductions
when determining best price and AMP. Some of these manufacturers
indicated that they did not combine these price reductions because the
price reductions occurred in two unrelated transactions to two separate
purchasers.
Figure 1: Example of How Prompt Payment Discounts in Chargeback
Situations Affect the Net Amount Realized by a Manufacturer:
[See PDF for image]
[End of figure]
In some cases, not accounting for the effect of both price reductions-
-the prompt payment discount and the chargeback--in the determination
of best price and AMP reduced rebates below what they otherwise would
have been. For example, rebates for three drugs in our sample would
have been 3 to 5 percent higher had the manufacturers considered the
effects of both price reductions when determining the best prices and
AMPs; for seven other drugs, rebates would not have changed. The
ultimate impact on rebates to states depends on how many manufacturers
adopted this approach as well as the sales prices and utilization of
the relevant drugs.
When determining best price and AMP, some manufacturers adopted methods
that could have raised rebates. For example, although the rebate
agreement excludes from AMP sales through the Federal Supply Schedule
and direct sales to hospitals and HMOs, which often involve relatively
low prices, one manufacturer included these sales in its calculations.
However, the manufacturer used list prices in the calculation of AMP
instead of the actual prices associated with the sales that were to be
excluded from the calculation.[Footnote 33] This approach, which
diverged from the rebate agreement and applicable CMS program
memoranda, could have resulted in artificially high AMPs, which in turn
could have raised rebates.
In addition, some manufacturers included in the determination of best
price the contract prices they had negotiated with purchasers, even if
they made no sales at those prices during the reporting quarter. This
practice resulted in a lower best price in some cases, which may have
increased rebates to states. One manufacturer, however, indicated that
it later might revise this practice and request recalculations to
recoup any excess rebates it had already paid. Manufacturers have up to
3 years to make such revisions.
Rebate Program Does Not Clearly Address Certain Financial Concessions
Negotiated by PBMs:
The rebates that manufacturers pay to states are based on a range of
prices and financial concessions that manufacturers make available to
entities that purchase their drugs, but may not reflect certain
financial concessions manufacturers offer to other entities in today's
complex market. In particular, the rebate program does not clearly
address certain concessions that are negotiated by PBMs on behalf of
third-party payers. The rebate program did not initially address these
types of concessions, which are relatively new to the market. CMS's
subsequent guidance to manufacturers has not clearly stated how
manufacturers should treat these concessions in their determinations of
best price and AMP.
Certain manufacturer financial concessions that are negotiated by PBMs
on behalf of their third-party payer clients, such as employer-
sponsored health plans and other health insurers, are not clearly
reflected in best price or AMP. PBMs, in one of the roles they play in
the market, may negotiate payments from manufacturers to help reduce
their third-party payer clients' costs for prescription drugs.[Footnote
34] (In these circumstances, the third-party payer does not purchase
drugs directly from the manufacturer but instead covers a portion of
the cost when its enrollees purchase drugs from pharmacies.[Footnote
35]) The basis of these PBM-negotiated manufacturer payments
varies.[Footnote 36] For example, manufacturers may make a payment for
each unit of a drug that is purchased by third-party payer enrollees or
may vary payment depending on a PBM's ability to increase the
utilization, or expand the market share, of a drug.[Footnote 37] The
payment may be related to a specific drug or a range of drugs offered
by the manufacturer.
The amount of financial gain PBMs receive from these negotiated
payments also varies. A PBM may pass on part or all of a manufacturer's
payment to a client, depending on the terms of their contractual
relationship. When a PBM passes on the entire manufacturer payment, the
manufacturer may pay the PBM a fee to cover the costs of administering
the program under which the payments are made. A PBM also may negotiate
a manufacturer payment for each unit of the drug purchased that
includes a fee, and the PBM may retain a part of that payment as
compensation. Some PBM clients may receive smaller discounts on drug
prices at the pharmacy in exchange for receiving all or a larger share
of the manufacturer payments, while other clients may receive greater
discounts on drug prices in exchange for the PBM retaining a larger
share of the manufacturer payment. Manufacturers may not be parties to
the contracts that PBMs have with their clients and so may not know the
financial arrangements between the PBMs and their clients.
These types of financial arrangements between manufacturers and PBMs
are a relatively new development in the market. When the program began
in 1991, PBMs played a smaller role in the market, managing fewer
covered lives and providing a more limited range of services--such as
claims processing--for their clients. Since then, PBMs' role has grown
substantially,[Footnote 38] contributing to a market that is much more
complex, particularly with respect to the types of financial
arrangements involving manufacturers. PBMs now commonly negotiate with
manufacturers for payments on behalf of their clients, in addition to
providing other services.[Footnote 39] Although complete data on the
prevalence and magnitude of PBM-negotiated manufacturer payments are
not readily available, PBM officials and industry experts have said
that these and other manufacturer payments to PBMs are a large portion
of PBMs' earnings;[Footnote 40] further, recent public financial
information suggests that manufacturer payments to PBMs as a whole are
substantial and key to PBMs' profitability.[Footnote 41]
CMS has acknowledged the complexity that arrangements between
manufacturers and PBMs introduce into the rebate program but has not
clearly addressed how these arrangements should be reflected in
manufacturer-reported prices. In 1997, CMS issued program memoranda
that noted new types of arrangements involving manufacturer payments to
PBMs and attempted to clarify whether those arrangements should be
reflected in best price and AMP.[Footnote 42] However, in a program
memorandum issued shortly thereafter, CMS stated that there had been
confusion concerning the intent of the previous program memoranda and
that the agency had "intended no change" to program
requirements.[Footnote 43] At the time, CMS said that staff were
reexamining the issue and planned to shortly clarify the agency's
position. As of January 2005, CMS had not issued such clarifying
guidance. When we asked how PBM-negotiated manufacturer payments should
be reflected in best price and AMP when PBMs have negotiated on behalf
of third parties, CMS officials with responsibility for issuing program
memoranda advised us that they could comment only on specific
situations. They stated that financial arrangements among entities in
the market are complex and always changing; in their view, the market
is too complicated for them to issue general policy guidance that could
cover all possible cases. Rather, these officials told us that they
make determinations about PBM payments on a case-by-case basis, but
only when manufacturers contact them regarding this issue.
Within the current structure of the rebate formula, additional guidance
on how to account for manufacturer payments to PBMs could affect the
rebates paid to states, although whether rebates would increase or
decrease as a result, and by how much, is uncertain. Because of the
structure of the rebate formula, any change in the determination of
best price and AMP could raise or lower rebates for any given drug,
depending on how the change affects the relationship between those
prices. Incorporating PBM-negotiated manufacturer payments into the
rebate determination could decrease the unit rebate amount for a drug
if, for example, it reduced AMP but had no effect on best
price.[Footnote 44] Alternatively, if such a change increased the
difference between AMP and best price for a drug, the unit rebate
amount could increase.[Footnote 45]
Conclusions:
The importance of Medicaid rebates to states has grown as Medicaid
spending on prescription drugs has risen. To determine the level of
rebates that manufacturers pay to states, the rebate program relies on
manufacturer-reported prices, which are based on the prices and
financial concessions available in the private pharmaceutical market.
CMS, however, has not provided clear program guidance for manufacturers
to follow when determining those prices. This has hampered OIG's
efforts to audit manufacturers' methods and reported prices.
Furthermore, as the private market has continued to evolve, the rebate
program has not adequately addressed how more recent financial
arrangements, such as those between manufacturers and PBMs, should be
accounted for in manufacturers' reported prices. In addition, oversight
by CMS and OIG has been inadequate to ensure that manufacturer-reported
prices and methods are consistent with the law, rebate agreement, and
CMS program memoranda. Because rebates rely on manufacturer-reported
prices, adequate program oversight is particularly important to ensure
that states receive the rebates to which they are entitled.
Recommendations for Executive Action:
To help ensure that the Medicaid drug rebate program is achieving its
objective of controlling states' Medicaid drug spending, we recommend
that the Administrator of CMS take the following two actions:
* Issue clear guidance on manufacturer price determination methods and
the definitions of best price and AMP, and update such guidance as
additional issues arise.
* Implement, in consultation with OIG, systematic oversight of the
price determination methods employed by pharmaceutical manufacturers
and a plan to ensure the accuracy of manufacturer-reported prices and
rebates paid to states.
Agency and Industry Comments and Our Response:
We received written comments on a draft of this report from HHS, which
incorporated comments from CMS and OIG. (See app. I.) HHS concurred, in
part, with our recommendation that CMS issue clear guidance on price
determination methods, noting agreement that such guidance would help
manufacturers, particularly with regard to accounting for sales to
PBMs. HHS stated that those issues would be examined and an assessment
made about where more guidance was needed. HHS noted that effort had
been devoted to providing guidance and that CMS would examine the
resources allocated to its review capabilities. In responding to our
discussion of the changing pharmaceutical market, however, the comments
noted that guidance could not address all current and potential
arrangements in the pharmaceutical market and therefore case-by-case
guidance would continue to be necessary to address specific situations.
In responding to our discussion of manufacturers' price determination
methods, the comments stated that a response to our conclusion that
some manufacturers' practices could lower or raise rebates was not
possible because we did not provide sufficient information on
manufacturers' practices. We believe that accurate and timely guidance
could reduce the need for case-by-case determinations. Although we
cannot present the detailed assumptions that various manufacturers made
in interpreting and implementing program guidance, because that
information is proprietary, we did provide examples of the different
price determination methods and assumptions that can affect best price
and AMP and, therefore, rebates.
HHS concurred, in part, with our recommendation that CMS should
implement systematic oversight of manufacturers' price determination
methods and a plan to ensure the accuracy of reported prices and
rebates. While the comments noted that requests from manufacturers to
revise their price determination methods were reviewed for adherence to
current policies, the comments disagreed with our conclusion that
current oversight does not ensure that prices or methods are consistent
with program criteria. The comments stated that CMS subjects
manufacturer-supplied data to systematic edits, that CMS has increased
its referrals to OIG to examine recalculation requests, and that a
regulation limiting the time frames for recalculations and
recordkeeping has been published. The comments also referred to
previous OIG reviews of manufacturer practices and the plans to
continue such reviews. In our draft, we noted the data edits that CMS
conducts, which help ensure the completeness of the data. The
systematic edits, however, do not ensure the accuracy of the data.
Specifically, while the edits address, for example, whether price data
are submitted in the correct format, they do not ensure that prices are
consistent with program criteria or that corrected prices are submitted
when necessary. We also noted OIG's ongoing work on the Medicaid drug
rebate program. However, CMS's referrals to OIG are made only when a
manufacturer requests that its rebates be recalculated, so there is no
ongoing review of the methods used by manufacturers. Finally, we also
noted in the draft the recently issued regulation, which did not
address all aspects of the program, such as determinations of best
price and AMP. The actions cited in the HHS comments do not constitute
adequate oversight of a program that relies on manufacturer-submitted
data to determine substantial rebates owed to state Medicaid programs.
Representatives from all the manufacturers that supplied us data were
invited to review and provide oral comments on portions of the draft
report, including the background and our discussion of manufacturers'
price determination methods. Representatives from five of the
manufacturers indicated that administrative fees that manufacturers pay
to PBMs do not necessarily need to be considered in the determination
of best price and AMP. Some argued that the fee is a payment for
services rendered and not a discount or rebate that would affect
prices. Some manufacturers also noted that we did not address payments
to PBMs when they are not acting as mail-order pharmacies. Others noted
that CMS's guidance with respect to payments to PBMs is particularly
unclear and that CMS's guidance has not addressed recent changes in the
pharmaceutical market. Six of the manufacturers took issue with our
discussion of the treatment of prompt payment discounts involving a
chargeback arrangement. Several stated that CMS has not indicated that
the prompt payment discount must be accounted for in the manner we
described. Some manufacturers noted that they treat the situation we
highlighted as two unrelated transactions to two separate purchasers,
so they do not need to combine both price reductions when determining
best price and AMP. Finally, six commented on the lack of clear
guidance on various aspects of determining best price and AMP. Some
manufacturers stated that program memoranda, which are a common CMS
method of issuing guidance for the rebate program, do not have to be
followed because they are not regulations.
In response to manufacturers' comments, we clarified our discussion of
administrative fees paid to PBMs when they act as a mail-order
pharmacies. We state that administrative fees may resemble volume-based
discounts when PBMs take possession of drugs. The manufacturers did not
have the opportunity to review our discussion of the changing
pharmaceutical market, which addresses the broader role of PBMs in
negotiating for third-party payers. With respect to our discussion of
prompt payment discounts involving a chargeback arrangement, we
observed in the draft that manufacturers differed in how they accounted
for price reductions when determining best price and AMP, and we have
clarified and expanded that discussion based on the comments we
received.
Both HHS and the manufacturers also provided technical comments, which
we incorporated as appropriate.
As agreed with your offices, unless you publicly announce its contents
earlier, we plan no further distribution of this report until 30 days
after its date. We will then send copies of this report to the
Secretary of Health and Human Services, the Administrator of CMS, the
Acting Inspector General of Health and Human Services, and other
interested parties. We will also provide copies to others upon request.
In addition, the report will be available at no charge on the GAO Web
site at http://www.gao.gov.
If you or your staffs have any questions about this report, please call
Marjorie Kanof at (202) 512-7114. Major contributors to this report are
listed in appendix II.
Signed by:
Laura A. Dummit:
Director, Health Care--Medicare Payment Issues:
[End of section]
Appendix I: Comments from the Department of Health and Human Services:
DEPARTMENT OF HEALTH & HUMAN SERVICES:
Office of Inspector General:
Ms. Laura A. Dummit:
Director, Health Care-Medicare Payment Issues:
U.S. Government Accountability Office:
Washington, DC 20548:
Dear Ms. Dummit:
Enclosed are the Department's comments on your draft report entitled,
"Medicaid Drug Rebate Program-Inadequate Oversight Raises Concerns
About Rebates Paid to States" (GAO-05-102). The comments represent the
tentative position of the Department and are subject to reevaluation
when the final version of this report is received.
The Department provided several technical comments directly to your
staff.
The Department appreciates the opportunity to comment on this draft
report before its publication.
Sincerely,
Signed by:
Daniel R. Levinson:
Acting Inspector General:
Enclosure:
The Office of Inspector General (OIG) is transmitting the Department's
response to this draft report in our capacity as the Department's
designated focal point and coordinator for Government Accountability
Office reports. OIG has not conducted an independent assessment of
these comments and therefore expresses no opinion on them.
COMMENTS OF THE DEPARTMENT OF HEALTH AND HUMAN SERVICES ON THE U.S.
GOVERNMENT ACCOUNTABILITY OFFICE'S DRAFT REPORT, "MEDICAID DRUG REBATE
PROGRAM-INADEQUATE OVERSIGHT RAISES CONCERNS ABOUT REBATES PAID TO
STATES" (GAO-OS-102):
The Department of Health and Human Services (HHS) appreciates the
opportunity to review the U.S. Government Accountability Office's
(GAO's) draft report. This report looks at the Medicaid drug rebate
program that requires participating drug manufacturers to submit to the
Centers for Medicare & Medicaid Services (CMS) the "average
manufacturer price" (AMP) and for brand name drugs, the "best price"
(BP) of drugs on a quarterly basis. Specifically, the report examines:
(1) Federal oversight of manufacturer-reported AMPs and BPs; (2) how
manufacturers' methods of determining AMP and BP could have affected
the rebates they paid to State Medicaid programs; and (3) how the
rebate program reflects financial concessions available in the private
market.
As discussed in the report, section 4401 of the Omnibus Budget
Reconciliation Act of 1990 added section 1927 to the Social Security
Act under which drug manufacturers must sign rebate agreements for
their outpatient drugs to be covered under the Medicaid Program.
The national rebate agreement requires manufacturers to provide certain
pricing information to CMS, and in turn, CMS reports a unit rebate
amount to the States. The manufacturers receive information from the
States on the total number of dosage units of each covered outpatient
drug paid by the State under the Medicaid State plan during the
quarter. The manufacturers then remit to the State a rebate payment
based on the number of units paid for and the unit rebate amount.
GAO Recommendation 1:
To help ensure that the Medicaid drug rebate program is achieving its
objective of controlling States' Medicaid drug spending, we recommend
that the Administrator of CMS take the following two actions:
* Issue clear guidance on manufacturer price determination methods and
the definitions of BP and AMP, and update such guidance as additional
issues arise.
HHS Response l:
We concur in part. While substantial time and effort have gone into
providing accurate and timely policy guidance, CMS agrees that
clarifying existing guidance, including addressing sales to Pharmacy
Benefit Managers (PBMs) in calculating AMP and BP, will be helpful to
manufacturers. Going forward, we will be examining these issues in
greater detail. We will work to assess where more guidance is needed by
examining those instances where manufacturers did not follow the
current guidance.
GAO Recommendation 2:
* Implement, in consultation with OIG, systematic oversight of the
price determination methods employed by pharmaceutical manufacturers
and a plan to ensure the accuracy of manufacturer-reported prices and
rebates paid to States.
HHS Response 2:
We concur in part. As the GAO report notes, the Office of the Inspector
General (OIG) has ongoing responsibility for audits for the Medicaid
program. While we currently review requests from manufacturers to
revise their methodologies for determining AMP and BP, this is a review
of adherence to the current policy. We continue to work with OIG to
provide policy guidance to them to conduct audits of manufacturers'
calculations of AMP and BP. We defer to OIG concerning the number and
level of audits that are possible given their resources. CMS will also
examine its own current allocation of resources pertaining to verifying
the accuracy of AMPS and BPs for drugs. It would be of assistance to
CMS in examining its internal resource allocation if GAO could provide
additional detail in the final report information about the time it
took it to review records on 135 drugs, and the additional time it
believes it would have taken to conduct a review detailed enough to
draw conclusions about the accuracy of the AMPS and BPs reported for
these drugs.
We note, however, that GAO did not develop firm conclusions about the
accuracy of AMPs and BPs of the 135 drugs for the 13 manufacturers for
the last two quarters of 2000. GAO neither reviewed nor provided an
estimate of the resources that would be needed to review the full
compliment of Medicaid drugs on an ongoing basis.
The following are HHS's responses to the GAO Findings in the draft
report:
GAO Finding: Current Program Oversight does not ensure that
manufacturer-reportedprices or price determination methods are
consistent with program criteria.
GAO concludes that CMS's and OIG's oversight of manufacturer-reported
price determination methods does not ensure that those prices or
methods are consistent with program criteria. CMS disagrees with this
conclusion. CMS applies systematic edits to data received from
manufacturers and seeks correction of data that fail these edits.
As a growing number of manufacturers have proposed to modify their
methodologies for calculating the AMP and BP in recent years, CMS has
increased the number of manufacturers referred to OIG for potential
onsite reviews. We also published a regulation to impose a 3-year time
limitation for manufacturers to recalculate and report data to CMS on
AMP and BP and to establish a 10-year recordkeeping requirement for
manufacturers to retain pricing records under the Medicaid drug rebate
program.
GAO Finding: Manufacturer price determination methods varied. Some
could have lead to lower rebates.
GAO concludes that there is considerable variation in the methods that
manufacturers use to determine AMP and BP. The GAO draft report does
not provide specific discussion regarding the varying assumptions that
were made by manufacturers or whether the manufacturers requested a
clarification of their assumptions from CMS. Without more information
from GAO, it is impossible for CMS to respond to this finding.
GAO also noted that in some cases manufacturers made assumptions that
could have caused manufacturers to overstate their rebate liability.
However, absent sufficient and specific information to review such
assumptions, we find that there is insufficient information to question
the reasonableness of these assumptions.
GAO Finding: The rebate program does not clearly address certain
financial concessions negotiated by PBMs.
The report notes that pharmacy benefit manager (PBM) price concessions
are a recent development in drug pricing and concludes that the current
program instructions do not clearly address certain financial
concessions by PBMs. In particular, the report states that the rebate
program does not clearly address certain concessions that are
negotiated by PBMs on behalf of third parties. As noted in the GAO
report, CMS has issued program releases and guidance regarding the
appropriate treatment of PBMs.
As stated above in our response to GAO's first recommendation, we agree
that further guidance would be helpful. In fact, we are developing such
guidance. We are concerned, however, that even the best general
guidance cannot address all current and potential arrangements and that
it will continue to be necessary for us to look at situations on a case-
by-case basis.
GAO Conclusion:
In addition, oversight by CMS and OIG has been inadequate to ensure
that manufacturer-reported prices and methods are consistent with the
law, rebate agreement and program guidance. Because rebates rely on
manufacturer-reported prices, adequate program oversight is
particularly important to ensure that states receive the rebates to
which they are entitled.
OIG has done a great deal of work on the Medicaid drug rebate program,
with a particular emphasis on manufacturer-reported data and methods.
Recommendations were made accordingly. Our fiscal year 2005 work plan
shows that work continues on this topic with a number of reviews
planned and underway. We note, too, that OIG does not exercise program-
operating responsibilities with respect to securing consistent
manufacturer-reported prices and methods, so it would be misleading to
imply that OIG can "ensure" such program compliance.
[End of section]
Appendix II: GAO Contact and Staff Acknowledgments:
GAO Contact:
Marjorie Kanof, (202) 512-7114:
Acknowledgments:
Major contributors to this report were Robin Burke, Martha Kelly, Ann
Tynan, Helen Desaulniers, Julian Klazkin, and Jennie Apter.
FOOTNOTES
[1] Medicaid is a jointly funded federal-state health care program that
covers certain low-income families and low-income individuals who are
aged or disabled. States have latitude within federal guidelines to
design their individual Medicaid programs with respect to eligibility,
services, and payment. Although prescription drug coverage is included
at states' discretion, all state Medicaid programs include drug
coverage.
[2] Pub. L. No. 101-508, §4401, 104 Stat. 1388, 1388-143-161 (codified
at 42 U.S.C. §1396r-8 (2000)). All states and the District of Columbia
participate in the Medicaid drug rebate program, except for Arizona.
[3] State Medicaid programs do not purchase drugs directly but rather
reimburse pharmacies when they dispense covered outpatient drugs to
Medicaid beneficiaries. These payments, which include an amount to
cover the cost of acquiring the drug as well as a dispensing fee, are
calculated using state-specific payment formulas.
[4] This rebate amount includes the three types of rebates included in
the Medicaid drug rebate program: the "basic" rebate for brand name
drugs, the "additional" rebate for brand name drugs, and the rebate for
generic drugs.
[5] Since fiscal year 1995, the amount that manufacturers have paid in
rebates has risen along with the increase in Medicaid drug spending;
rebates, as a percentage of Medicaid drug spending, fluctuated from
about 17 percent to just over 19 percent of spending between fiscal
years 1995 and 2002.
[6] This report focuses on the basic rebate for brand name drugs, not
the additional rebate for brand name drugs--which occurs when a brand
name drug's AMP rises faster than inflation, as measured by changes in
the consumer price index--or the rebate for generics. The total unit
rebate amount for a brand name drug includes the basic rebate and any
additional rebate.
[7] CMS was known as the Health Care Financing Administration until
July 1, 2001. In this report, we refer to the agency as CMS when
discussing agency actions.
[8] The rebate agreement is a standard contract between CMS and each
manufacturer that governs manufacturers' participation in the rebate
program, providing, among other things, definitions of key terms.
[9] For example, according to the Department of Justice (DOJ), in 2003
one manufacturer agreed to pay $88 million to settle allegations raised
by DOJ under the False Claims Act that it had underpaid Medicaid
rebates due to states by reporting inaccurate best price information
for two of its drugs. In 2004, another manufacturer agreed to pay $345
million in connection with allegations that it had underpaid rebates
for one of its drugs by failing to properly report best price.
[10] See GAO, Federal Employees' Health Benefits: Effects of Using
Pharmacy Benefit Managers on Health Plans, Enrollees, and Pharmacies,
GAO-03-196 (Washington, D.C.: Jan. 10, 2003).
[11] In 1995, CMS issued a proposed rule for implementation of the drug
rebate program, which included provisions regarding best price, AMP,
and manufacturer reporting requirements. See 60 Fed. Reg. 48442 (1995).
Only a portion of that rule--concerning the length of time
manufacturers are able to report price adjustments to CMS and how long
they must retain documentation of their reported prices--has been
issued in final form. See 68 Fed. Reg. 51912 (2003).
[12] As of October 2004, CMS had issued a total of 65 program
memoranda--also called "program releases"--to manufacturers to provide
guidance on a range of issues relating to the rebate program.
[13] Several memoranda address whether prices to certain types of
health care providers should be considered in determining best price or
AMP, for example. CMS also responds to questions from individual
manufacturers on a case-by-case basis. In addition, the agency provides
an operational training guide and training for manufacturers and states
on resolving disputes over state-reported drug utilization information
used to calculate rebate amounts.
[14] The rebate agreement also requires manufacturers to maintain
records of their assumptions.
[15] See 42 U.S.C. §1396r-8(c)(1)(C). The rebate agreement further
defines best price as the lowest price at which the manufacturer sells
the drug to any purchaser in any pricing structure, including capitated
payments, with some exceptions.
[16] Sales made through the Federal Supply Schedule are not considered
in determining best price, nor are single-award contract prices of any
federal agency, federal depot prices, and prices charged to the
Department of Defense, Department of Veterans Affairs, Indian Health
Service, and Public Health Service.
[17] See 42 U.S.C. §1396r-8(k)(1). The statute states that customary
prompt payment discounts are to be subtracted from prices used to
calculate AMP. There is no definition in the statute for "retail
pharmacy class of trade."
[18] Under the rebate agreement, AMP is calculated as net sales divided
by units sold, excluding free goods (i.e., drugs or any other items
given away, but not contingent on any purchase requirements).
[19] See 42 U.S.C. §1396r-8(c)(1).
[20] The 2003 final rule, which covered only two issues raised in the
1995 proposed rule, addressed the time frame for reporting price
adjustments to CMS and the time frame for retaining documentation of
reported prices. See 60 Fed. Reg. 48442 (1995), 68 Fed. Reg. 51912
(2003), 68 Fed. Reg. 55527 (2003). In this final rule, CMS required
that a manufacturer retain written or electronic records documenting
reported prices for 3 years after those prices are submitted to CMS or
for a longer period if the records are the subject of an audit or a
government investigation, of which the manufacturer is aware, relating
to best price or AMP. However, just after the final rule became
effective in January 2004, CMS issued an interim final rule that
replaced the 3-year recordkeeping requirement with a 10-year
recordkeeping requirement for calendar year 2004; manufacturers still
are required to retain records for a longer period if the records are
the subject of an audit or government investigation. 69 Fed. Reg. 508
(2004). At the same time, CMS issued a proposed rule that would make
the 10-year requirement permanent. 69 Fed. Reg. 565 (2004).
[21] Manufacturers may request a rebate recalculation, for example,
after a merger, if the merging manufacturers need to reconcile
different price determination methods.
[22] We asked CMS officials to provide information on all recalculation
requests since the program's inception in 1991. CMS officials told us
that they do not have data on all of the recalculation requests prior
to September 2000.
[23] States refund rebate payments to manufacturers by having the
future rebate payments they receive from manufacturers reduced.
[24] See Department of Health and Human Services, Office of Inspector
General, Medicaid Drug Rebates: The Health Care Financing
Administration Needs to Provide Additional Guidance to Drug
Manufacturers to Better Implement the Program, A-06-91-00092
(Washington, D.C.: November 1992).
[25] Although CMS disagreed with OIG, it said it would further clarify
AMP calculation in a forthcoming drug rebate program regulation. As of
October 2004, the regulation had not been issued and CMS officials told
us that the agency had no plans to promulgate any such regulation in
the near future. Instead, the agency has issued several program
memoranda intended to provide guidance on how manufacturers should
calculate AMP.
[26] OIG reports on individual manufacturers are not publicly available.
[27] In response to OIG recommendations, CMS said it would provide the
manufacturer with a copy of recent guidance on AMP: Medicaid Drug
Rebate Program Release No. 29, June 1997. This document, released to
all manufacturers at the time OIG was conducting the 1997 review, in
some cases differed from OIG's definition of retail pharmacy class of
trade. It stated, for example, that sales to nursing home and mail-
order pharmacies are to be included in AMP, while OIG's definition
excluded these entities.
[28] Letter from OIG to Ranking Minority Member, Committee on
Government Reform, House of Representatives, November 22, 1999.
[29] Medicaid Drug Rebate Program Release No. 47, July 2000.
[30] See Department of Health and Human Services, Office of Inspector
General, Medicaid Drug Rebates: Sales to Repackagers Excluded from Best
Price Determinations, A-06-00-00056 (Washington, D.C.: March 2001).
[31] Medicaid Drug Rebate Program Release No. 2, August 1991.
[32] See Medicaid Drug Rebate Program Release No. 14, December 1994,
regarding administrative fees, and Medicaid Drug Rebate Program
Releases No. 28, April 1997, and No. 29, June 1997, regarding PBM
arrangements.
[33] Citing limitations in its data systems, this manufacturer used the
wholesale acquisition cost, which is the manufacturer's list price for
wholesalers or other direct purchasers before any rebates, discounts,
allowances, or other price concessions.
[34] GAO-03-196.
[35] PBMs often manage the transactions that take place between third-
party payers and pharmacies. For example, in some cases, when an
enrollee purchases a drug at a retail pharmacy, the pharmacy collects
from the enrollee the appropriate cost sharing amount and then submits
a claim to the PBM for reimbursement. The PBM pays the pharmacy and
collects reimbursement from its third-party payer client.
[36] Some PBMs operate mail-order pharmacies and, when doing so, may
separately negotiate rebates or discounts with manufacturers for the
drugs they purchase for that component of their business.
[37] In managing pharmacy benefit plans for their clients, PBMs can
influence the utilization of drugs using several approaches, such as
formularies--lists of drugs that are approved for reimbursement by the
PBM's clients--and tiered copayment systems that use financial
incentives to encourage enrollees to select certain drugs.
[38] In 2004, according to a study prepared for a national association
representing PBMs, an estimated 200 million people, or about 68 percent
of the U.S. population, were in private plans that used PBMs. See
PricewaterhouseCoopers, The Value of Pharmacy Benefit Management and
the National Cost Impact of Proposed PBM Legislation (July 2004),
http://www.pcmanet.org/research.asp (downloaded January 18, 2005).
[39] For example, PBMs now design pharmacy benefit plans--working with
clients on issues such as which drugs to cover and how much of a drug's
cost will be paid by enrollees--and provide clinical support such as
disease management programs for enrollees with specific illnesses.
[40] GAO-03-196.
[41] For example, according to financial reports filed with the
Securities and Exchange Commission, three large PBMs together received
over $4.3 billion in total fiscal year 2002 payments from
manufacturers. These payments can include payments related to PBM
negotiations on behalf of clients as well as other payments such as
fees. For one of the PBMs we reviewed, manufacturer payments totaled 7
percent of its revenue. (Comparable information on manufacturer
payments was not available from the other PBMs' financial reports.) All
three PBMs stated in their financial reports that manufacturer payments
were important to their profitability.
[42] Medicaid Drug Rebate Program Release No. 28, April 1997, and
Medicaid Drug Rebate Program Release No. 29, June 1997.
[43] Medicaid Drug Rebate Program Release No. 30, September 1997.
[44] A change in guidance regarding how PBM payments should be
reflected in best price would not necessarily affect the best price for
every drug because best price can be determined by a transaction that
is not related to PBM payments.
[45] A greater difference between best price and AMP would not always
yield a larger rebate. For example, if the difference between the two
prices increased but remained less than 15.1 percent of AMP, the unit
rebate amount would still be based on the 15.1 percent of AMP minimum.
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