Medicaid Outpatient Prescription Drugs: Estimated Changes to Federal Upper Limits Using the Formula under the Patient Protection and Affordable Care Act

Spending on prescription drugs in Medicaid--the joint federal-state program that finances medical services for certain low-income adults and children--totaled $15.2 billion in fiscal year 2008. State Medicaid programs do not directly purchase prescription drugs; instead, they reimburse retail pharmacies for covered prescription drugs dispensed to Medicaid beneficiaries. The federal government provides matching funds to state Medicaid programs to help cover a portion of the cost of these reimbursements. For certain outpatient prescription drugs for which there are three or more therapeutically equivalent versions, state Medicaid programs may only receive federal matching funds for reimbursements up to a maximum amount, which is known as a federal upper limit (FUL). FULs were designed as a cost-containment strategy and have historically been calculated as 150 percent of the lowest published price for the therapeutically equivalent versions of a given drug from among the prices published nationally in three drug pricing compendia. The prices from these compendia are list prices suggested by drug manufacturers and do not reflect actual transaction prices. State Medicaid programs have the authority to determine their own reimbursement amounts to retail pharmacies for covered prescription drugs. However, for drugs subject to a FUL, the federal government will only provide matching funds to the extent that a state's annual reimbursements do not exceed the sum of the FULs for all such drugs. Concerns have been raised about FULs calculated based on compendia prices. For example, a 2005 report by the Department of Health and Human Services (HHS) Office of Inspector General (OIG) found that FULs calculated in this manner were ineffective at controlling spending on these drugs. The 2005 OIG report found that the prices in the three price compendia used to set FULs often greatly exceeded prices in the marketplace. The Deficit Reduction Act of 2005 (DRA) established a FUL formula based on average manufacturer price (AMP) rather than compendia prices. In contrast to compendia prices, AMP represents the average of actual transaction prices paid to manufacturers for a given drug and is typically less than any of a drug's published compendium prices. Drug manufacturers are required to report AMPs to the Centers for Medicare and Medicaid Services (CMS) on a monthly basis. DRA also expanded the list of drugs subject to a FUL from those with three or more therapeutically equivalent versions to include drugs with two or more therapeutically equivalent versions. Congressional interest in controlling prescription drug costs using AMP-based FULs continues. The Patient Protection and Affordable Care Act (PPACA) established a new AMP-based formula for calculating FULs and changed the definition of AMP.8 Under PPACA, FULs are to be calculated as no less than 175 percent of the utilization-weighted average of the most recently reported monthly AMPs for the pharmaceutically and therapeutically equivalent versions of a drug. Congress expressed interest in an early indication of the potential effects of PPACA on FULs and asked us to examine the likely effects of PPACA's AMP-based formula by drawing upon data from 2008 that we gathered for our November 2009 report, including 2008 AMPs that pre-date PPACA's changes to the definition of AMP. This report examines how, for selected drugs, estimated FULs using PPACA's AMP-based formula and 2008 data compare to pre-PPACA FULs and to average retail pharmacy acquisition costs.