Medicaid Drug Rebate Program
Inadequate Oversight Raises Concerns about Rebates Paid to States Gao ID: GAO-05-850T June 22, 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. GAO was asked to discuss issues relating to the rebate program and in February 2005 issued a report, Medicaid Drug Rebate Program: Inadequate Oversight Raises Concerns about Rebates Paid to States (GAO-05-102). For that report, GAO reviewed program guidance and OIG reports and conducted an analysis of rebates for brand name drugs. This testimony is based on the February 2005 report.
As noted in the February 2005 report, GAO found that 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 and only reviews price determination methods when manufacturers request recalculations of prior rebates. In several reports, 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 manufacturer-reported prices, including a lack of clear guidance on how AMP should be calculated. GAO noted that although in some cases OIG found problems with manufacturers' price determination methods and prices, CMS had not followed up with manufacturers to make sure that problems had been resolved. GAO also found considerable variation in the methods that manufacturers used to determine best price and AMP. In some cases, manufacturers' assumptions could have lowered rebates; in other cases, their assumptions could have raised rebates. 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. GAO found that manufacturers made varying assumptions about which sales and prices to include and exclude from their determinations of best price and AMP. Manufacturers also differed in how they accounted for certain price reductions, fees, and other transactions when determining best price and AMP. 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 negotiated by pharmacy benefit managers (PBM) on behalf of third-party payers. 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 when determining best price and AMP. Additional guidance on how to account for these payments could affect rebates, although whether rebates would increase or decrease as a result, and by how much, is uncertain.
GAO-05-850T, Medicaid Drug Rebate Program: Inadequate Oversight Raises Concerns about Rebates Paid to States
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Testimony:
Before the Subcommittee on Health, Committee on Energy and Commerce,
House of Representatives:
United States Government Accountability Office:
GAO:
For Release on Delivery Expected at 2:00 p.m. EDT:
Wednesday, June 22, 2005:
Medicaid Drug Rebate Program:
Inadequate Oversight Raises Concerns about Rebates Paid to States:
Statement of Kathleen King:
Director, Health Care:
GAO-05-850T:
GAO Highlights:
Highlights of GAO-05-850T, a testimony before the Subcommittee on
Health, Committee on Energy and Commerce, House of Representatives:
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. GAO was asked to discuss issues
relating to the rebate program and in February 2005 issued a report,
Medicaid Drug Rebate Program: Inadequate Oversight Raises Concerns
about Rebates Paid to States (GAO-05-102). For that report, GAO
reviewed program guidance and OIG reports and conducted an analysis of
rebates for brand name drugs. This testimony is based on the February
2005 report.
What GAO Found:
As noted in the February 2005 report, GAO found that 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 and only reviews price determination
methods when manufacturers request recalculations of prior rebates. In
several reports, 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 manufacturer-reported
prices, including a lack of clear guidance on how AMP should be
calculated. GAO noted that although in some cases OIG found problems
with manufacturers‘ price determination methods and prices, CMS had not
followed up with manufacturers to make sure that problems had been
resolved.
GAO also found considerable variation in the methods that manufacturers
used to determine best price and AMP. In some cases, manufacturers‘
assumptions could have lowered rebates; in other cases, their
assumptions could have raised rebates. 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. GAO found that
manufacturers made varying assumptions about which sales and prices to
include and exclude from their determinations of best price and AMP.
Manufacturers also differed in how they accounted for certain price
reductions, fees, and other transactions when determining best price
and AMP.
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 negotiated by
pharmacy benefit managers (PBM) on behalf of third-party payers. 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 when determining best price and AMP.
Additional guidance on how to account for these payments could affect
rebates, although whether rebates would increase or decrease as a
result, and by how much, is uncertain.
What GAO Recommends:
In its February 2005 report, GAO recommended that CMS issue clear,
updated guidance on manufacturer price determination methods and price
definitions. It also recommended 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 acknowledged HHS oversight actions
but did not believe they ensured accurate rebates to states.
www.gao.gov/cgi-bin/getrpt?GAO-05-850T.
To view the full product, including the scope and methodology, click on
the link above. For more information, contact Kathleen King at (202)
512-7118.
[End of section]
Mr. Chairman and Members of the Subcommittee:
I am pleased to be here today to discuss our report entitled Medicaid
Drug Rebate Program: Inadequate Oversight Raises Concerns about Rebates
Paid to States, which we issued in February 2005.[Footnote 1]
Prescription drug spending accounts for a substantial and growing share
of state Medicaid program outlays. 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 recent years, the importance of
Medicaid rebates to states has grown as Medicaid spending on
prescription drugs has risen. From fiscal year 2000 to 2003, Medicaid
drug spending increased at an annual average rate of 18 percent, while
Medicaid spending as a whole grew 10 percent annually during that
period. In fiscal year 2003, Medicaid drug expenditures were $33.8
billion out of $273.6 billion in total Medicaid spending; under the
rebate program, manufacturers paid rebates to states of about $6.5
billion for covered outpatient drugs.[Footnote 3],[Footnote 4]
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 5] 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) administers and
oversees the rebate program, entering into rebate agreements with
manufacturers,[Footnote 6] 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 the Department of Health and Human
Services' (HHS) Office of Inspector General (OIG).
In this testimony, I will discuss our February 2005 report, in which we
addressed (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.
In carrying out our work, we reviewed the rebate statute, the standard
rebate agreement between CMS and participating manufacturers, CMS
program memoranda, OIG reports on the rebate program, and market
literature; interviewed officials from CMS and OIG; and conducted an
analysis of rebates for brand name drugs, for which 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. We performed our work
from December 2003 through January 2005 in accordance with generally
accepted government auditing standards.
In brief, we reported in February 2005 that 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. We
found that CMS conducts only limited checks for reporting errors in
manufacturer-reported drug prices and only reviews price determination
methods when manufacturers request recalculations of prior rebates. In
addition, OIG reported that its review efforts were hampered by unclear
CMS guidance on how manufacturers are to determine AMP and by a lack of
manufacturer documentation. Although OIG in some cases identified
problems with manufacturers' price determination methods and reported
prices, CMS had not followed up with manufacturers to make sure that
those problems had been resolved. We also found considerable variation
in the methods that the manufacturers we reviewed used to determine
best price and AMP. In some cases, manufacturers' assumptions could
have lowered rebates; in other cases, their assumptions could have
raised rebates. 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. We
found that manufacturers made varying assumptions about which sales and
prices to include and exclude from their determinations of best price
and AMP. We also found that manufacturers differed in how they
accounted for certain price reductions, fees, and other transactions
when determining best price and AMP. Finally, we found that the rebates
that manufacturers pay to states are based on prices and financial
concessions that manufacturers 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 concessions that are
negotiated by pharmacy benefit managers (PBM) on behalf of third-party
payers--concessions that are a relatively new development in the
market.
We concluded that although the rebate program relies on manufacturer-
reported prices to determine the level of rebates that manufacturers
pay to states, CMS has not provided clear program guidance for
manufacturers to follow when determining those 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. We recommended that CMS
take several steps to improve program guidance and oversight, namely,
to issue clear guidance on manufacturer price determination methods and
the definitions of best price and AMP; update such guidance as
additional issues arise; and 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. HHS agreed with the
importance of guidance to manufacturers, but disagreed with our
conclusion that there has been inadequate program oversight. We
acknowledged HHS's oversight actions, but stated that HHS oversight
does not adequately ensure the accuracy of manufacturer-reported prices
and rebates paid to states. Some of the manufacturers that supplied
data for the report raised concerns about our discussion of certain
methods they used to determine rebates, and 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.
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 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. The private market
also includes PBMs, which manage prescription drug benefits for third-
party payers and may also operate mail-order pharmacies.[Footnote 7]
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 8] CMS has issued program memoranda[Footnote 9]
in order to provide further guidance to manufacturers regarding how to
determine best price and AMP.[Footnote 10] 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 11] 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 12] 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 13] 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 14] 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 15] 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 16] 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.
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 because of, 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 17]
Program Oversight Does Not Ensure That Manufacturer-Reported Prices or
Price Determination Methods Are Consistent with Program Criteria:
As we reported in February 2005, 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. In addition, OIG reported that its
review efforts had been hampered by unclear CMS guidance on how to
determine AMP and by a lack of manufacturer documentation. Although OIG
in some cases identified problems with manufacturers' price
determination methods and reported prices, CMS had not followed up with
manufacturers to make sure that those problems were resolved.
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
ensure that, for example, prices are submitted in the correct format
and that the reported prices are for drugs covered by Medicaid. When
data checks indicate a potential reporting error, CMS asks the
manufacturer for corrected drug prices, but CMS does not have a
mechanism in place to track whether the manufacturer submits 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.
For example, CMS notifies a manufacturer if the unit rebate amount for
a drug deviates from that of the prior quarter by more than 50 percent.
It would be up to that manufacturer to indicate whether the underlying
reported prices were correct. If the manufacturer determined that there
were problems with the reported price--for example, typographical
errors such as misplaced decimals--it would send corrected data to
CMS.[Footnote 18] If the manufacturer did not send revised pricing data
to CMS, then the unit rebate amount would remain the same.
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.
Furthermore, CMS does not generally check to ensure that manufacturers'
methods are consistent with the rebate statute and rebate agreement,
but rather reviews the methods 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. CMS requires the manufacturer to submit
both its original and its revised methods when requesting a
recalculation of prior rebates so that the agency can evaluate whether
the revised methods are consistent with the rebate statute, rebate
agreement, and program memoranda. Recalculations can involve
substantial amounts of money; for example, six approved recalculations
we examined reduced prior rebates to states by a total of more than
$220 million.
In reports on its audits of manufacturer-reported prices, OIG stated
that its efforts were hampered by unclear CMS guidance on determining
AMP and by a lack of manufacturer documentation. 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 19] OIG could not evaluate manufacturers' methods
for determining 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 20]
In its second review of manufacturer-reported prices, in 1995 OIG
attempted to verify one manufacturer's recalculation request. While OIG
reported that it could not complete its analysis because of inadequate
manufacturer documentation,[Footnote 21] 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 22] 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
like 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 23] 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 24] In 2001, OIG reported that states lost
$80.7 million in rebates in fiscal year 1999 because of improperly
excluded drug sales to HMO repackagers.[Footnote 25] 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.
As we reported, 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.
Manufacturer Price Determination Methods Varied: Some Could Have Led to
Lower Rebates:
As we reported, we found considerable variation in the methods that the
manufacturers we reviewed 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
and prices to include and exclude from their determinations of best
price and 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.
We also found that manufacturers also differed in how they accounted
for certain price reductions, fees, and other transactions when
determining best price and AMP. For example, manufacturers differed in
how they accounted for certain transactions involving prompt payment
discounts. In some cases, manufacturers' assumptions could have reduced
rebates below what they otherwise would have been. In other cases,
manufacturers' methods could have raised rebates. For example, 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 could have
increased rebates to states.[Footnote 26]
Rebate Program Does Not Clearly Address Certain Financial Concessions
Negotiated by PBMs:
As we reported, 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 they 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, such as employer-sponsored health
plans and other health insurers. 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. 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.
Certain manufacturer financial concessions that are negotiated by PBMs
on behalf of their third-party payer clients 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 27]
(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.) The basis of these
PBM-negotiated manufacturer payments varies. 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. 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. 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, 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. 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 28] further, recent public financial information
suggests that manufacturer payments to PBMs as a whole are substantial
and key to PBMs' profitability.
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 29] 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 30] 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 on 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 31] Alternatively, if such a change increased the
difference between AMP and best price for a drug, the unit rebate
amount could increase.[Footnote 32]
Concluding Observations:
As we stated in our report, because the rebate program relies on
manufacturer-reported prices, adequate program oversight is important
to ensure that states receive the rebates to which they are entitled.
However, CMS has not provided clear program guidance for manufacturers
to follow when determining prices, and this has hampered OIG's efforts
to audit manufacturers' methods and 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. As a result, we
recommended that CMS take several steps to improve program guidance and
oversight, namely, to issue clear guidance on manufacturer price
determination methods and the definitions of best price and AMP; update
such guidance as additional issues arise; and 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. We
believe that these actions could help ensure that the Medicaid drug
rebate program achieves its objective of controlling states' Medicaid
drug spending. HHS agreed with the importance of guidance to
manufacturers, but disagreed with our conclusion that there has been
inadequate program oversight. We acknowledged HHS's oversight actions,
but stated that HHS oversight does not adequately ensure the accuracy
of manufacturer-reported prices and rebates paid to states. Some of the
manufacturers that supplied data for the report raised concerns about
our discussion of certain methods they used to determine rebates, and
we clarified our discussion of manufacturers' price determination
methods.
Mr. Chairman, this concludes my prepared statement. I would be happy to
respond to any questions you or other Members of the Subcommittee may
have.
Contact and Staff Acknowledgments:
For further information about this testimony, please contact Kathleen
King at (202) 512-7118. Debra Draper, Robin Burke, and Ann Tynan also
made key contributions to this statement.
FOOTNOTES
[1] See GAO, Medicaid Drug Rebate Program: Inadequate Oversight Raises
Concerns about Rebates Paid to States, GAO-05-102 (Washington, D.C.:
Feb. 4, 2005).
[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] This testimony 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.
[6] 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.
[7] 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).
[8] 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 69 Fed. Reg. 68815 (2004), 68 Fed. Reg. 51912
(2003).
[9] 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.
[10] 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.
[11] The rebate agreement also requires manufacturers to maintain
records of their assumptions.
[12] 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.
[13] 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.
[14] 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."
[15] 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).
[16] See 42 U.S.C. §1396r-8(c)(1).
[17] The 2003 final rule addressed the time frame for reporting price
adjustments to CMS and the time frame for retaining documentation of
reported prices. See 68 Fed. Reg. 51912, 55527 (2003).
[18] 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.
[19] See HHS OIG, 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).
[20] 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; as we reported, CMS
officials told us that the agency had no plans to promulgate any such
regulation in the near future. Instead, CMS has issued several program
memoranda intended to provide guidance on how manufacturers should
calculate AMP.
[21] OIG reports on individual manufacturers are not publicly
available.
[22] 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.
[23] Letter from HHS OIG to Ranking Minority Member, Committee on
Government Reform, House of Representatives, November 22, 1999.
[24] Medicaid Drug Rebate Program Release No. 47, July 2000.
[25] See HHS OIG, Medicaid Drug Rebates: Sales to Repackagers Excluded
from Best Price Determinations, A-06-00-00056 (Washington, D.C.: March
2001).
[26] 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.
[27] GAO-03-196.
[28] GAO-03-196.
[29] Medicaid Drug Rebate Program Release No. 28, April 1997, and
Medicaid Drug Rebate Program Release No. 29, June 1997.
[30] Medicaid Drug Rebate Program Release No. 30, September 1997.
[31] 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.
[32] 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.
