OIG Says Medicaid Overpaying for Prescription Drugs, Recommends Implementation of Affordable Care Act Pricing Formula

by King & Spalding

According to a recent HHS OIG report, Medicaid is overpaying for certain prescription drugs as a result of its reliance on the Federal upper limit (FUL) payment methodology based largely on published price information provided by drug manufacturers.  The report, published on October 16, echoes a concern raised in previous OIG work—that the current FUL program results in prices that are significantly higher than those in the broader marketplace.

The FUL program is a cost containment measure that limits Medicaid reimbursement for prescription drugs with available generic versions, otherwise known as “multiple-source” drugs.  According to the report, CMS has historically used a published price methodology whereby the FUL amount for a multiple-source drug is generally set at 150 percent of the price listed in national compendia for the cheapest therapeutically equivalent product, plus a reasonable dispensing fee.  The prices published in the compendia, the report notes, are commonly based on wholesale price or cost information provided by drug manufacturers.  The Affordable Care Act (ACA) established a new method of calculating the FUL amount, which sets the amount at no less than 175 percent of the weighted average of the monthly average manufacturer price (AMP).  CMS has not yet implemented the ACA’s AMP-based FUL amount formula, but it has begun to publish draft FUL amounts based on AMPs for review and comment.

To determine how the ACA would impact FUL amounts, OIG compared prices generated by the existing published price-based methodology to prices generated by the AMP-based methodology.  OIG also compared published price-based and AMP-based FUL amounts to pharmacy acquisition costs.  OIG’s findings include the following:

  • Based on data from late-2011, AMP-based FUL amounts were 61 percent lower, at the median, than published price-based FUL amounts for a sample of 518 drugs.  Of the 518-drug sample, 461 FUL amounts were lower using the ACA methodology; and within those 461 drugs, the AMP-based FUL amount for 330 of them was less than half the published price-based FUL amount.
  • The published price-based FUL amounts for a November 2010 sample of 601 drugs were over four times greater, in the aggregate, than pharmacy acquisition costs.
  • AMP-based FUL amounts would have exceeded sampled pharmacy acquisition costs, in the aggregate, in another November 2010 sample.
  • The reporting of AMP data—which are needed to calculate FUL amounts under the ACA—improved substantially from 2010 to 2011.  The report attributes this improvement in part to OIG’s imposition of civil monetary penalties on manufacturers that do not report pricing data or report them late.

In light of these findings, OIG recommends that CMS continue to release draft AMP-based FUL amounts for public review and comment and that CMS complete the full implementation of the AMP-based FUL program.

Click here to view the OIG report.

Reporter, Greg Sicilian, Atlanta, +1 404 572 2810, gsicilian@kslaw.com.

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