Medicaid:

States' Payments for Outpatient Prescription Drugs

GAO-06-69R: Published: Oct 31, 2005. Publicly Released: Nov 30, 2005.

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Spending on outpatient prescription drug coverage for Medicaid beneficiaries has accounted for a substantial and growing share of Medicaid program expenditures. All states and the District of Columbia have elected to include outpatient prescription drug coverage as a benefit of their Medicaid programs. Total Medicaid expenditures on outpatient prescription drugs grew from $4.6 billion (nearly 7 percent of Medicaid's total medical care expenditures) in fiscal year 1990 to $33.8 billion (13 percent of Medicaid's total medical care expenditures) in fiscal year 2003. This represented more than twice the rate of increase in total Medicaid spending from fiscal year 1990 through fiscal year 2003. Amid concerns about increasing Medicaid drug spending, focus has been drawn to the ways states pay for prescription drugs. State Medicaid programs pay pharmacies for covered outpatient prescription drugs dispensed to Medicaid beneficiaries. The Centers for Medicare & Medicaid Services (CMS)--the agency of the Department of Health and Human Services (HHS) that oversees states' Medicaid programs--sets maximum payment limits for certain drugs--federal upper limits (FUL)--and provides guidelines regarding drug payment, as defined by regulation. Within these parameters, states may determine their own drug payment methodologies. States are to pay pharmacies the lower of the state's estimate of the drug's acquisition cost to the pharmacy, plus a dispensing fee, or the pharmacy's usual and customary charge to the general public; for certain drugs, the FUL or the state maximum allowable cost (MAC) may apply if lower. All states estimate the acquisition cost of drugs using published prices because they do not have access to actual sales price data, which are not publicly available. Most states choose to estimate drug acquisition cost by taking a percentage discount off of Average Wholesale Price (AWP). AWP is a list price that a manufacturer suggests wholesalers charge pharmacies. Based on concerns about escalating Medicaid drug expenditures, Congress asked us to review state Medicaid payments for covered outpatient prescription drugs. We reviewed how Medicaid payments for prescription drugs compared across selected states and how these states' Medicaid payments for prescription drugs compared to three market-based prices.

Overall, minimal variation existed among the five states' payments for most drugs. Specifically, the five states' payments for 189 brand-name drugs varied less than 7 percent on average; the five states' payments for the 5 generic drugs we reviewed varied 30 percent on average. States' payment levels aligned with their respective formulas for estimating drug acquisition cost. In particular, states that based their estimates of drug acquisition cost on larger discounts off of AWP often paid the lowest amount for drugs; similarly, states that based their estimates of drug acquisition cost on smaller discounts off of AWP often paid the highest amount for drugs. The five states' payments exceeded the three market-based prices we reviewed--Average Manufacturer Price (AMP), Best Price, and Federal Supply Schedule (FSS) Price. Each state's payments exceeded these market-based prices for nearly all of the brand-name drugs we reviewed. On average, each state's payments for brand-name drugs exceeded each market-based price by 10 percent or more. Additionally, states' average payments for brand-name drugs were 12 percent higher than AMP, 36 percent higher than Best Price, and 73 percent higher than FSS Price, on average. Our results highlight the differences between states' payments (based on the lower of states' estimates of drug acquisition cost or the pharmacy's usual and customary charge; for certain drugs, the FUL or the state MAC may apply if lower) and market-based prices (based on actual sales transaction data).

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