Medicaid Overpaying for Drugs

Medicaid Is Overpaying for Drugs

August 31, 2001

Medicaid Is Overpaying for Drugs, According to Federal Investigators

By SARAH LUECK
Staff Reporter of THE WALL STREET JOURNAL

WASHINGTON -- Brand-name prescription drugs are costing state Medicaid programs far more than they should, according to federal investigators.

Typically, pharmacies buy drugs from drug makers at a discount price. But when Medicaid pays pharmacies for those drugs, it doesn't take those discounts fully into account, according to a report coming from the inspector general of the Department of Health and Human Services.

If states had included the full discounts pharmacies received from drug companies on the 200 most common brand-name drugs Medicaid covers, they could have saved as much as $1 billion in 1999, the report said.

States typically base their payments to pharmacies on the average wholesale price, or AWP, minus a percentage that represents the discounts pharmacies achieve. The AWP, similar to a sticker price on a car, is based on reports from drug manufacturers and is frequently subject to negotiation. The inspector general's report found that pharmacies got about 22% off the AWP for the brand-name drugs being studied; state Medicaid programs based their reimbursement on a discount of about 10%.

The report recommends that the federal government "require the states to bring pharmacy reimbursement more in line ... with the cost being realized by the pharmacies in their states," wrote Michael Mangano, principal deputy inspector general. The AWP is under increased scrutiny, as state and federal officials investigate drug-industry pricing practices.

State Medicaid costs have skyrocketed in recent years, in part because of the rising price of prescription drugs. As state budgets are squeezed, officials are looking for ways to cut the costs of the program. Michael McMullan, acting deputy administrator of the federal government's Centers for Medicare and Medicaid Services, said in a written response to the report that he would forward the findings to states and "encourage them to review their estimates of acquisition costs."

Pharmacies stand to lose money if states decide to raise the discount used to calculate reimbursement and have vigorously opposed such changes in the past. They argue that Medicaid reimbursement already doesn't pay them adequately for additional costs linked to the drugs, such as storage, dispensing and distribution.

Kurt Proctor of the National Association of Chain Drug Stores said the study is incorrect because pharmacies don't receive 22% discounts for brand-name drugs from manufacturers. "With our core knowledge of this business, we know it isn't accurate," he said.

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