Recent HHS-OIG Reports Suggest Future Medicaid Reforms

The Department of Health and Human Service’s Office of Inspector General (OIG) has issued a couple of reports lately on Medicaid coverage of prescription drugs and we thought we’d highlight them here.

The first report suggests that the Medicaid program could save hundreds of millions of dollars a year by re-determining the calculation of average manufacturer price (AMP) for some authorized generic products.  The second report is not quite as encompassing but makes the fascinating point that Medicaid is actually paying for some covered outpatient drugs that have not been approved by the Food and Drug Administration (FDA).  In its attempt to address drug pricing this year, and to ensure the smooth operation of the Medicaid prescription drug rebate program, CMS and Congress are likely to pay close attention to both reports.

Let’s look at the AMP report first.  As we have written in the past, states can choose (but are not required) to cover prescription drugs under their Medicaid programs.  All states have elected that benefit option.  Manufacturers that want their drugs covered must agree to pay rebates and in exchange for those rebates, states must generally cover the drugs on their formulary.  For brand name drugs, the rebate is generally equal to 23.1 of the AMP of the drug (for generic drugs, the rebate is generally 13%).  Rebates can be even higher if the manufacturer offers a better price to some payers than to Medicaid – in other words, Medicaid must always get the best price.  Manufacturers pay an additional rebate if the price of their drug increases by more than the inflation rate.

Under the law, AMP is defined as the average price paid for the drug in the United States to the manufacturer by wholesalers for drugs distributed to retail pharmacies (and, in the case of retail pharmacies that purchase drugs directly, the average price paid by those pharmacies).  In other words, what is key is the amount paid to the manufacturer, but only amounts paid by wholesalers or retail pharmacies that purchase drugs directly.

What the Inspector General found was that, in the case of authorized generic drugs, when the manufacturer transfers the drug to a secondary manufacturer, and included the price of the drug in the transfer, the transfer price of the authorized generic drug was usually far less than the sales price of the brand name drug.  Including that lower price in the calculation of AMP significantly lowers the AMP and, in turn, the rebate that manufacturers owe.  According to the report, just nine drugs alone resulted in rebates of nearly $600 million less than would have been the case if the sales of the authorized generic to a secondary manufacturer were not included in the calculation of AMP.

An authorized generic drug is a drug that is sold under the brand manufacturer’s New Drug Application but is sold under a different National Drug Code.  In the typical case, the manufacturer of the brand name drug either sells the authorized generic in its own right, or else it permits another manufacturer to do so.  There is almost always a close relationship between the brand name manufacturer and the authorized generic manufacturer (sometimes they are the same company), and that may explain the lower transfer price on the first sale of the product.

CMS concurred in the findings of the OIG report, but both CMS and the OIG acknowledge that a change in the law is likely necessary to address the issue.  It is likely that Congress will be reviewing the findings closely in light of the attention being paid to drug pricing this year.

The OIG’s second report was not as significant but its findings were certainly interesting, at least to those of us at the Medicaid and the Law blog.

In order for a drug to be covered by Medicaid, it must be approved as safe and effective by the FDA.[1]  There are some limited exceptions, but for the most part, FDA approval for safety and efficacy is a prerequisite for coverage as a drug under Medicaid (and, for that matter, Medicare).  But the OIG found that, for 3% of drugs for which Medicaid made a payment, the agency could either not determine FDA approval status and, for an astounding 267 drugs, the drugs were not approved by the FDA at all.  According to the OIG, “it is possible that reimbursement for some of these 267 drugs may not have been appropriate.”  State Medicaid programs paid $34 million for the drugs that were not FDA approved.

As a result of its findings, the OIG urged CMS to work with states to recoup the $34 million that was inappropriately reimbursed and to improve its reporting systems to ensure that inappropriate drugs are not paid for by Medicaid.  CMS concurred with the OIG’s recommendation, although posed some questions about the methodology used in the report.  Nevertheless, the report does raise serious concerns regarding patient safety and program integrity.

[1] Social Security Act § 1927(k)(2)(A)(i).

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