Medicare :: New Medicaid drug payment rule

A new method of setting limits on what the federal government will reimburse state Medicaid agencies for prescription drug payments ? aimed at reigning in inflated drug product payments ? was announced in a final rule put on display at the Federal Register.

?This new payment formula allows Medicaid to pay more appropriately for prescription drugs dispensed to Medicaid beneficiaries,? said Leslie V. Norwalk, Esq., acting administrator of the Centers for Medicare & Medicaid Services (CMS).

The new regulation is expected to save states and the federal government $8.4 billion over the next five years. Even with this change, the Medicaid program is still expected to spend $140 billion for drugs over the same time period, fiscal years 2007 through 2011.

The change, part of the Deficit Reduction Act (DRA) of 2005, is in part a reaction to a series of reports issued in 2004 by both the Government Accountability Office (GAO) and the HHS Office of the Inspector General (OIG) showing that Medicaid payments to pharmacies for generic drugs were much higher than what pharmacies were actually paying for those drugs.

Both the GAO and the OIG found that states were overpaying for drugs because they were using commercial drug pricing guides as the basis for setting state reimbursement levels. The investigation of these drug ?compendia? documented that these prices were artificially inflated, especially for generic drugs. Pharmacies, the reports showed, made the most profit on those generic drugs with the highest mark-up, creating an incentive to dispense those drugs.

Earlier efforts to stem growth in Medicaid drug costs were unsuccessful. Prior to the DRA, Federal Upper Limits (FULs), which capped federal matching payments to states for generic drugs, were based on artificially inflated prices reported in the commercial pricing compendia. For example, the OIG found that for 23 of the 25 drugs under review, FULs set under the previous calculation method were more than double the average pharmacy acquisition costs.

?These prices (FULs) were so high that most states set their own upper limits on allowable drug costs that were generally far less than the federal FUL,? Norwalk said.

Prior to the DRA, many drug companies reported prices to the compendia that bore little relationship to the drug?s cost. Actual drug costs were considered proprietary information that was kept secret. CMS was prohibited by law from disclosing Average Manufacturers Price (AMP).

The DRA also makes an important change to health care purchasing by introducing transparency in Medicaid prescription drug pricing and requiring that for the first time, AMPs be publicly reported on the Internet. States will now be able to use actual AMP information as the basis for setting drug reimbursement. Drug makers will also have to report AMPs monthly, as well as quarterly, as was the practice prior to DRA. More frequent reporting will allow states to make timely adjustments to reimbursement rates.

The rule will also require states to collect information from physicians on drugs they administer in their offices. According to federal law, manufacturers are required to give the state a rebate for all covered outpatient drugs given to Medicaid patients. States have had some trouble collecting the information but now must require it from doctors who must use the proper billing or National Drug Code (NDC) information. Without the proper NDC, a state cannot bill the drug maker for that rebate.

In response to comments on the final rule CMS also:

Revised the definition of retail pharmacy class of trade and wholesaler to better track the provisions of the DRA. For example, it clarified that sales to entities such as pharmacy benefit managers and pharmacies serving nursing homes and assisted living facilities are excluded from the determination of AMP.
Added manufacturer coupons redeemed by an agent, pharmacy or entity acting on behalf of the manufacturer to the list of prices excluded from the determination of AMP.
Added that manufacturer vouchers and manufacturer-sponsored drug discount card programs are excluded from the determination of AMP.
Added that sales to home infusion and specialty pharmacies are included in AMP.
Adopted the final average sales price reporting rule?s (71 FR 69668, December 1, 2006) interpretation of the definition of bona fide service fees and how manufacturers may apply the definition for the purposes of AMP and best price.
?This new calculation method will allow Medicaid to pay more accurately for the medicines enrollees need,? Norwalk said. ?Furthermore, it will yield a payment level that will be sufficient to assure widespread availability of drugs for Medicaid patients.? The total pharmacy revenue for prescription drugs will decline by less than one percent, according to industry data, she added.

Recognizing that the new payment calculations could result in some reduction in drug-related payments to pharmacies, CMS is actively encouraging states to evaluate whether other fees they pay pharmacies are adequate to compensate them for their costs in dispensing the prescription.

The final rule provides for a new definition of ?dispensing fees? which cover a pharmacy?s costs of dispensing the drug including overhead. In order to adjust dispensing fees, state Medicaid programs must submit a state plan amendment for federal approval. Dispensing fees receive a full federal match and are not limited by the new FULs.

Although being published as a final rule, CMS does solicit additional comments on two key areas: (1) the so-called ?outlier policy? that eliminates from AMP calculations any drug in an FUL that is priced significantly lower than other drugs in that category and (2) definition of AMP. This will allow CMS the benefit of further public comment as actual AMP numbers become available and the FULs are developed.

Interested parties will have 180 days to submit comments. CMS will respond to those comments and publish a final rule on those provisions at a later date.

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