Third OIG report on Medicaid Rx costs still draws pans


OIG report draws alarm from R.Ph.s



Third OIG report on Medicaid Rx costs still draws pans

A little better, but still seriously flawed. That's how pharmacists feel about a new Office of Inspector General report on how much pharmacists should be paid for dispensing to Medicaid patients.

The new report follows two others OIG had issued earlier—one on brand-name drugs, released August 2001, which pharmacy associations had asked OIG to withdraw; the other on generics, which came out this past March. The new report, which includes all drugs, found that pharmacies are purchasing pharmaceuticals at a wide range of discounts from average wholesale price, depending on what type of drug is involved. It recommended that if state Medicaid agencies continue to pay pharmacies based on AWP, they should consider offering a percentage discount off AWP for four tiers of drugs:

  • Tier one covers single-source brand-name drugs.

  • Tier two includes innovator multiple-source drugs without federal upper limits (FULs).

  • Tier three comprises non-innovator multiple-source drugs without FULs.

  • Tier four provides FUL price for FUL multiple-source drugs.

OIG said that one state is already using a three-tiered system, and three states are weighing similar reimbursement methodologies. OIG also came out with percentage discount amounts off AWP for each of the four tiers (see "The four-tiered system").

"The numbers are closer to reality in terms of what the actual market is," but there is one major shortcoming, commented Stephen Schondelmeyer, Pharm.D., Ph.D., director of the PRIME Institute at the University of Minnesota College of Pharmacy. Reimbursement is based on actual acquisition cost and a dispensing fee, with no mention of a markup. Without a markup and with dispensing fees at a meager $2 or $3, pharmacists won't have enough to cover their cost of dispensing and running a pharmacy, he argued.

Similarly, John Rector, senior v.p. for government affairs and general counsel of the National Community Pharmacists Association, said the report, if adopted, would put many independent pharmacists out of business. NCPA estimates that on sole-source brand-name drugs alone, independents would lose close to $5 on average on each Rx dispensed. Considering that Medicaid accounts for an average 20% of its members' business, they can ill afford to take such a big hit.

Believing the OIG report is very "anti-small business" and should not be "left uninterrupted," Rector said NCPA is proposing legislation entitled "The Pharmacy Medicaid Patient and Small Business Relief Act." The bill would prohibit the feds from proselytizing the report and encouraging its adoption in the states. The bill would also call for each state to conduct a survey on the costs associated with dispensing and require, as a condition of participation in Medicaid, that each state adopt the results of its survey.

Like NCPA, the National Association of Chain Drug Stores has serious concerns about the OIG report. "The report is fatally flawed and should not be used by Medicaid agencies to set reimbursement," asserted Larry Kocot, senior v.p. and general counsel of NACDS.

Schondelmeyer has another criticism of OIG's findings. He argued that paying pharmacies based on actual acquisition cost isn't necessarily the ideal when it comes to generic drugs. A better way to go would be for the states to "provide the right incentive to pharmacists to keep their generic fill rates high in the Medicaid program." An adequate incentive is more likely to drive pharmacists to generically substitute, thus lowering Medicaid's drug costs, he explained. It's for this reason that payers, such as Blue Cross Blue Shield of Michigan and Illinois, are pushing so hard on the use of generics, he added.

So are states going to adopt OIG's recommendations despite objections from national pharmacy associations? Indications are that the federal report will be a factor as states set their Medicaid pharmacy reimbursement rates. For instance, at press time, Massachusetts extended the deadline for pharmacies to submit their drug cost information following the release of the OIG report. Pharmacies there are bracing for a new, reduced rate to be issued this month.

Judy Chi

The four-tiered system

A new report by the Office of Inspector General concludes that pharmacies are purchasing drugs at a percentage below AWP for each of four tiers of drugs. The percentages for the four tiers are:

  • For single-source innovator drugs, 17.2% below AWP

  • For all drugs without federal upper limits (FULs), 27.2% below AWP

  • For multiple-source drugs without FULs, 44.2% below AWP

  • For multiple-source drugs with FULs, 72.1% below AWP

OIG said it collected these findings from a stratified random sample of 40 pharmacies from eight states: Colorado, Florida, Indiana, Montana, Texas, Washington, West Virginia, and Wisconsin.


Judy Chi. Third OIG report on Medicaid Rx costs still draws pans. Drug Topics 2002;19:65.

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