Medicaid: States' Payments for Outpatient Prescription Drugs	 
(31-OCT-05, GAO-06-69R).					 
                                                                 
Spending on outpatient prescription drug coverage for Medicaid	 
beneficiaries has accounted for a substantial and growing share  
of Medicaid program expenditures. All states and the District of 
Columbia have elected to include outpatient prescription drug	 
coverage as a benefit of their Medicaid programs. Total Medicaid 
expenditures on outpatient prescription drugs grew from $4.6	 
billion (nearly 7 percent of Medicaid's total medical care	 
expenditures) in fiscal year 1990 to $33.8 billion (13 percent of
Medicaid's total medical care expenditures) in fiscal year 2003. 
This represented more than twice the rate of increase in total	 
Medicaid spending from fiscal year 1990 through fiscal year 2003.
Amid concerns about increasing Medicaid drug spending, focus has 
been drawn to the ways states pay for prescription drugs. State  
Medicaid programs pay pharmacies for covered outpatient 	 
prescription drugs dispensed to Medicaid beneficiaries. The	 
Centers for Medicare & Medicaid Services (CMS)--the agency of the
Department of Health and Human Services (HHS) that oversees	 
states' Medicaid programs--sets maximum payment limits for	 
certain drugs--federal upper limits (FUL)--and provides 	 
guidelines regarding drug payment, as defined by regulation.	 
Within these parameters, states may determine their own drug	 
payment methodologies. States are to pay pharmacies the lower of 
the state's estimate of the drug's acquisition cost to the	 
pharmacy, plus a dispensing fee, or the pharmacy's usual and	 
customary charge to the general public; for certain drugs, the	 
FUL or the state maximum allowable cost (MAC) may apply if lower.
All states estimate the acquisition cost of drugs using published
prices because they do not have access to actual sales price	 
data, which are not publicly available. Most states choose to	 
estimate drug acquisition cost by taking a percentage discount	 
off of Average Wholesale Price (AWP). AWP is a list price that a 
manufacturer suggests wholesalers charge pharmacies. Based on	 
concerns about escalating Medicaid drug expenditures, Congress	 
asked us to review state Medicaid payments for covered outpatient
prescription drugs. We reviewed how Medicaid payments for	 
prescription drugs compared across selected states and how these 
states' Medicaid payments for prescription drugs compared to	 
three market-based prices.					 
-------------------------Indexing Terms------------------------- 
REPORTNUM:   GAO-06-69R 					        
    ACCNO:   A40717						        
  TITLE:     Medicaid: States' Payments for Outpatient Prescription   
Drugs								 
     DATE:   10/31/2005 
  SUBJECT:   Comparative analysis				 
	     Cost analysis					 
	     Drugs						 
	     Medicaid						 
	     Medical economic analysis				 
	     Prices and pricing 				 
	     State-administered programs			 
	     Pharmaceutical industry				 
	     Program costs					 
	     Prescription drugs 				 
	     Outpatient care					 
	     Mississippi					 
	     Montana						 
	     Pennsylvania					 
	     South Carolina					 
	     Utah						 

******************************************************************
** This file contains an ASCII representation of the text of a  **
** GAO Product.                                                 **
**                                                              **
** No attempt has been made to display graphic images, although **
** figure captions are reproduced.  Tables are included, but    **
** may not resemble those in the printed version.               **
**                                                              **
** Please see the PDF (Portable Document Format) file, when     **
** available, for a complete electronic file of the printed     **
** document's contents.                                         **
**                                                              **
******************************************************************
GAO-06-69R

     

     * PDF6-Ordering Information.pdf
          * Order by Mail or Phone

United States Government Accountability Office Washington, DC 20548

October 31, 2005

The Honorable Edward Whitfield Chairman Subcommittee on Oversight and
Investigations Committee on Energy and Commerce House of Representatives

Subject: Medicaid: States' Payments for Outpatient Prescription Drugs

Dear Mr. Chairman:

Spending on outpatient prescription drug coverage for Medicaid
beneficiaries has accounted for a substantial and growing share of
Medicaid program expenditures. 1 All states and the District of Columbia
have elected to include outpatient prescription drug coverage as a benefit
of their Medicaid programs. Total Medicaid expenditures on outpatient
prescription drugs grew from $4.6 billion (nearly 7 percent of Medicaid's
total medical care expenditures) in fiscal year 1990 to $33.8 billion (13
percent of Medicaid's total medical care expenditures) in fiscal year
2003. This represented more than twice the rate of increase in total
Medicaid spending from fiscal year 1990 through fiscal year 2003. Amid
concerns about increasing Medicaid drug spending, focus has been drawn to
the ways states pay for prescription drugs.

State Medicaid programs pay pharmacies for covered outpatient prescription
drugs dispensed to Medicaid beneficiaries. The Centers for Medicare &
Medicaid Services (CMS)-the agency of the Department of Health and Human
Services (HHS) that oversees states' Medicaid programs-sets maximum
payment limits for certain drugs-federal upper limits (FUL) 2-and provides
guidelines regarding drug payment, as defined by regulation. 3 Within
these parameters, states may determine their own drug payment
methodologies. States are to pay pharmacies the lower of the state's
estimate of the drug's acquisition cost to the pharmacy, plus a dispensing
fee, or the

1

Medicaid is a joint federal-state program that finances health insurance
for certain low-income adults and children.

2See 42 C.F.R. S: 447.332 (2004). Federal regulations require CMS to set
specific FUL amounts for certain multiple-source drugs that are provided
by at least three suppliers. A multiple-source drug is a drug that is
either marketed or sold by two or more manufacturers or labelers, or
marketed or sold by the same manufacturer or labeler under two or more
different proprietary names or both under a proprietary name and without
such a name. Payments for these drugs must not exceed, in the aggregate, a
reasonable dispensing fee plus an amount that equals 150 percent of the
lowest published price of the drug listed in national pricing compendia.

3See 42 C.F.R. S: 447.331 (2004).

          GAO-06-69R States' Medicaid Payments for Prescription Drugs

pharmacy's usual and customary charge to the general public; for certain
drugs, the FUL or the state maximum allowable cost (MAC) may apply if
lower. 4 All states estimate the acquisition cost of drugs using published
prices because they do not have access to actual sales price data, which
are not publicly available. Most states choose to estimate drug
acquisition cost by taking a percentage discount off of Average Wholesale
Price (AWP). 5 AWP is a list price that a manufacturer suggests
wholesalers charge pharmacies.

Based on concerns about escalating Medicaid drug expenditures, you asked
us to review state Medicaid payments for covered outpatient prescription
drugs. We reviewed how Medicaid payments for prescription drugs compared
across selected states and how these states' Medicaid payments for
prescription drugs compared to three market-based prices.

We briefed your staff on the information contained in this report on
September 16, 2005. As discussed with your staff at that time, we agreed
to issue this report, which officially transmits the briefing slides (see
enc. I) and expands on the information provided at the briefing.

                             Scope and Methodology

To examine state Medicaid payments for outpatient drugs, we analyzed CMS
data to develop a basket of 200 drugs that accounted for more than half of
Medicaid's national spending on outpatient prescription drugs in 2003. 6
We judgmentally selected five states for review-Mississippi, Montana,
Pennsylvania, South Carolina, and Utah; these states utilize a varying
percentage discount off of AWP to estimate drug acquisition cost. We
interviewed officials from the five states' Medicaid agencies to gather
information on each state's pharmacy payment practices. We also obtained
the five states' 2003 payment data for each of the 200 drugs in our
basket. For every drug, we calculated each state's payment per unit. 7
Using these calculations, we reviewed the variation in the percent
difference between the lowest state payment and the highest state payment
for each drug. We report our findings

4

As of December 2003, 38 states had established maximum allowable costs for
multiple-source drugs at a rate below an established FUL or for drugs for
which CMS had not set an FUL.

5

States may obtain AWP from one or more national pricing compendia;
although multiple sources publish price lists, the prices listed by one
source do not necessarily equal the prices listed by other sources.

6

For the purpose of this report, the term drug refers to a distinct
national drug code (NDC). NDCs identify unique formulations of each drug,
including the manufacturer, strength, and package size. A single drug may
have multiple NDCs. Because our analysis was performed at the NDC level,
multiple versions of the same drug are included in our basket.

7

State's payment per unit was the state's payment to pharmacies as
determined by the lowest of: the state's estimate of drug acquisition
cost, the pharmacy's usual and customary charge, the FUL, if available, or
the state MAC, if available, divided by the number of units dispensed. Our
report summarizes results from our analysis of states' payments per unit
as calculated without dispensing fees.

GAO-06-69R States' Medicaid Payments for Prescription Drugs

based on drug type (brand or generic) and drug therapeutic class based on
data we obtained from First DataBank. 8

To compare state Medicaid payments to selected market-based prices, we
reviewed how states' average payments compared to three prices that are
based on actual sales transactions-Average Manufacturer Price (AMP), Best
Price, and Federal Supply Schedule (FSS) Price. We selected AMP and Best
Price because they are currently used in the Medicaid program to calculate
drug rebates; 9 FSS Price was selected because it represents prices
available to certain federal government purchasers. Table 1 provides
descriptive characteristics of these prices. We obtained AMP and Best
Price data from CMS and FSS Price data from the Department of Veterans
Affairs (VA). 10 We assessed the variation in the percent difference
between each state's payment and the states' average payment, to each of
the market-based prices.

8

Drugs that possess similar chemical structures and similar therapeutic
effects are grouped into therapeutic classes. Most drugs within a class
produce similar benefits, side effects, adverse reactions, and
interactions with other drugs and substances.

9

The Omnibus Budget Reconciliation Act of 1990, Pub. L. No. 101-508 S:
4401, 104 Stat. 1388-143-1388-161, established the Medicaid drug rebate
program to help control Medicaid drug spending. Under the rebate program,
a pharmaceutical manufacturer pays rebates to states in order for federal
payments to be available under Medicaid for the manufacturer's outpatient
drugs.

10

AMP and Best Price data are reported quarterly; we obtained data on both
prices for all four quarters of 2003 and calculated the average 2003 AMP
and Best Price. FSS Price is reported based on a contract period; if more
than one contract was in place during calendar year 2003, we averaged the
available 2003 FSS Prices for the purposes of our analysis.

GAO-06-69R States' Medicaid Payments for Prescription Drugs

            Table 1: Characteristics of Selected Market-Based Prices

     See 42 U.S.C. S: 1396r-8(k)(1). According to CMS, transactions used to
      calculate AMP are to reflect cash discounts and any adjustments that
affect the price realized, but are not to include prices to direct federal
purchasers based on the Federal Supply Schedule (FSS), prices from direct
      sales to hospitals or health maintenance organizations, or prices to
    wholesalers when they relabel drugs they purchase under their own label.
      There is no definition in the statute for "retail pharmacy class of
                                    trade."

               Definition The                         Defined by Data         
               average price                          statute or availability 
               paid to          Price determination   regulation Not publicly 
  Price        manufacturers by method Manufacturers  Yes        available    
  Average      wholesalers for  calculate AMP based              
  Manufacturer drugs            on actual sales data             
  Price (AMP)  distributed to   and report it to the             
               the retail       Centers for Medicare             
               pharmacy class   & Medicaid Services              
               of trade.a       (CMS).b                          
  Best Price   The lowest price Manufacturers         Yes Yes    Not publicly 
  Federal      available from   calculate Best Price             available    
  Supply       the manufacturer based on actual sales            Publicly     
  Schedule     to any           data and report it to            available    
  (FSS) Price  wholesaler,      CMS.b On behalf of               
               retailer,        the federal                      
               provider, health government, the                  
               maintenance      Department of                    
               organization, or Veterans Affairs (VA)            
               nonprofit or     negotiates FSS Prices            
               government       based on                         
               entity, with     manufacturer-reported            
               some exceptions. data on actual sales             
               c A price that   to their most favored            
               is intended to   commercial customers.            
               equal or better  d                                
               the prices                                        
               charged to a                                      
               manufacturer's                                    
               most favored                                      
               nonfederal                                        
               customer under                                    
               comparable terms                                  
               and conditions.                                   
               FSS Prices are                                    
               available to all                                  
               direct federal                                    
               purchasers of                                     
               pharmaceuticals,                                  
               although other                                    
               lower prices may                                  
               be available to                                   
               the largest                                       
               federal                                           
               purchasers.                                       

Source: GAO analysis of CMS and VA data.

Note: Retail pharmacies that dispense prescription drugs to Medicaid
beneficiaries may be unable to purchase drugs at AMP, Best Price, or FSS
Price.

a

b

The Omnibus Reconciliation Act of 1990 created AMP and Best Price for use
in the Medicaid program to calculate drug rebates. As we noted in our
February 2005 report, we found considerable variation in the methods
manufacturers used to determine AMP and Best Price. See GAO, Medicaid Drug
Rebate Program: Inadequate Oversight Raises Concerns about Rebates Paid to
States, GAO-05-102 (Washington, D.C.: Feb. 4, 2005).

See 42 U.S.C. S: 1396r-8(c)(1)(C). CMS has further defined Best Price as
the lowest price at which the manufacturer sells the drug to any purchaser
in any pricing structure, including capitated payments, with some
exceptions. Best Price is required to be reduced to account for price
adjustments such as discounts and rebates, but is not to include prices
charged to certain federal purchasers (including prices to direct federal
purchasers based on the FSS) and other select purchasers.

d

See Pub. L. No. 102-585, S: 603, 106 Stat. 4943, 4971-75. The Veterans
Health Care Act of 1992 required that drug manufacturers list their
brand-name drugs on the FSS in order for purchases of such drugs to be
eligible for Medicaid payment. During a multiyear contract period, FSS
Prices may not increase faster than inflation.

GAO-06-69R States' Medicaid Payments for Prescription Drugs

While we generally relied on and did not independently verify the data
provided to us by the states, we reviewed the data for reasonableness and
to identify unusual patterns, including outliers. To ensure that state
payments and market-based prices were based on the same number of units,
we compared the units used to calculate both. Where necessary, we
recalculated unit payments to ensure valid per-unit comparisons. We also
reviewed the reasonableness of states' payments in comparison to their
formulas for estimating acquisition cost. Additionally, we discussed
unusual patterns and outliers with state Medicaid officials and as a
result of unresolved data reliability concerns, eliminated six drugs from
our basket. 11 Our final basket contained 194 drugs, which consisted of
189 brand-name drugs-187 single-source and 2 multiple-source drugs-and 5
generic drugs. 12

Our results cannot be generalized to states or drugs not included in our
analysis. Our work also did not consider other mechanisms state Medicaid
programs may use to control the costs of prescription drugs, such as the
collection of rebates through federal and state programs and policies on
the mandatory use of generic drugs. Furthermore, our analysis did not
examine the utilization of drugs and therefore does not estimate cost
savings for the Medicaid program. We performed our work from February 2004
through October 2005 in accordance with generally accepted government
auditing standards.

                                Results in Brief

Overall, minimal variation existed among the five states' payments for
most drugs. Specifically, the five states' payments for 189 brand-name
drugs varied less than 7 percent on average; the five states' payments for
the 5 generic drugs we reviewed varied 30 percent on average. States'
payment levels aligned with their respective formulas for estimating drug
acquisition cost. In particular, states that based their estimates of drug
acquisition cost on larger discounts off of AWP often paid the lowest
amount for drugs; similarly, states that based their estimates of drug
acquisition cost on smaller discounts off of AWP often paid the highest
amount for drugs.

The five states' payments exceeded the three market-based prices we
reviewed- AMP, Best Price, and FSS Price. Each state's payments exceeded
these market-based prices for nearly all of the brand-name drugs we
reviewed. On average, each state's payments for brand-name drugs exceeded
each market-based price by 10 percent or more. Additionally, states'
average payments for brand-name drugs were 12 percent higher than AMP, 36
percent higher than Best Price, and 73 percent higher than FSS

11

Five of the six excluded drugs were antihemophiliac factor drugs; the
sixth drug was an injectable drug used to treat multiple sclerosis. As a
result of data reliability concerns, we also excluded data on five drugs
from one state, and data on one drug each from two states.

12

For the purposes of this report, we refer to single-source and
multiple-source drugs that are marketed under a registered trade name as
brand-name drugs. Single-source drugs are brand-name drugs that have no
generic equivalent on the market and are generally available from only one
manufacturer.

GAO-06-69R States' Medicaid Payments for Prescription Drugs

Price, on average. Our results highlight the differences between states'
payments (based on the lower of states' estimates of drug acquisition cost
or the pharmacy's usual and customary charge; for certain drugs, the FUL
or the state MAC may apply if lower) and market-based prices (based on
actual sales transaction data).

                           Agency and State Comments

We provided a draft of this report for comment to the Administrator of CMS
and Medicaid directors in Mississippi, Montana, Pennsylvania, South
Carolina, and Utah. CMS comments are included in enclosure II. We received
technical comments from some states, which we incorporated as appropriate.

CMS stated that this report makes it clear that the current payment rules
result in overpayments for drugs and emphasizes the need for reform. CMS
commented that payments should be determined using accurate acquisition
cost data, which it said requires congressional action. Our review focused
on describing how payments for prescription drugs compared across selected
states and how these states' payments compared to three market-based
prices. As such, the scope of our work did not include an evaluation of
the need to reform the current payment system. CMS also commented that it
has encouraged states to review their estimates of drug acquisition cost
and that states have submitted to the agency an increased number of
amendments to their state Medicaid plans that would lower these estimates.
Finally, CMS commented that the report focused solely on states' payment
rates for drugs and did not consider a variety of other approaches that
states have adopted to control their drug spending. As we noted in our
draft report, such consideration was beyond the scope of our work.

One state-Utah-raised concerns that states do not have access to the
market-based pricing data we used in our analysis, which makes it
difficult for them to accurately estimate the acquisition cost of drugs.
Our draft report noted that states do not have access to actual sales
price data and that states therefore use published prices, such as AWP, to
estimate the acquisition cost of drugs.

As agreed with your office, unless you publicly announce the contents of
this report earlier, we plan no further distribution of it until 30 days
from the date of this report. At that time, we will send copies to the
Administrator of CMS and interested congressional committees. The report
will also be available on GAO's home page at http://www. .govgao .

GAO-06-69R States' Medicaid Payments for Prescription Drugs

If you or your staff have any questions about this report, please contact
me at (202) 512-7119 or [email protected]. Contact points for our Offices of
Congressional Relations and Public Affairs may be found on the last page
of this report. GAO staff who made major contributions to this report are
listed in enclosure III.

Kathleen M. King Director, Health Care

Enclosures - 3

GAO-06-69R States' Medicaid Payments for Prescription Drugs

          Medicaid: States' Payments for Outpatient Prescription Drugs

 Briefing for Congressional Staff Subcommittee on Oversight and Investigations
                     House Committee on Energy and Commerce

                                   (Updated)

     o Outpatient prescription drug coverage is an optional Medicaid benefit
       that all 50 states and the District of Columbia provide.
     o Spending on outpatient prescription drugs has been one of Medicaid's
       fastest growing medical care expenditures.
     o Amid concerns about increasing Medicaid drug spending, focus has been
       drawn to the ways states pay for prescription drugs.
     o State Medicaid programs pay pharmacies for covered outpatient drugs
       dispensed to Medicaid beneficiaries.
     o States are required to pay pharmacies the lower of the state's
       estimate of the drug's acquisition cost to the pharmacy, based on a
       state-determined formula, plus a dispensing fee; or the pharmacy's
       usual and customary charge to the general public. For certain drugs,
       the federal upper limit (FUL) or the state maximum allowable cost
       (MAC) may apply if lower.
     o All states use published prices, such as Average Wholesale Price
       (AWP), to estimate the acquisition cost of drugs because they do not
       have access to actual sales price data, which are not publicly
       available. AWP is the average list price that a manufacturer suggests
       wholesalers charge pharmacies.
s
       compare across selected states.
and or generic)
       using 2005 First DataBank definitions.
     o Judgmentally selected 5 states for review.
     o Interviewed officials from the 5 state Medicaid agencies.
     o Reviewed 2003 drug payment data from the 5 states for the 200 drugs.
     o Calculated each state's average payment to pharmacies for each drug.
     o Reviewed selected 2003 market-based price data from the Centers for
       Medicare & Medicaid Services (CMS) and the Department of Veterans
       Affairs (VA).
          * Performed our work from February 2004 through October 2005 in
            accordance with generally accepted government auditing standards.
          * Our initial basket of 200 drugs reflected more than half of
            Medicaid's national spending on outpatient prescription drugs in
            2003.
     o We performed data reliability testing on all state drug payment data.
     o We recalculated unit payment amounts where necessary to ensure that
       state payments and market-based prices were based on the same number
       of units.
          * Due to data reliability concerns, we excluded 6 drugs from our
            basket.1
          * For the 5 selected states, we performed analyses on a final
            basket of 194 drugs that included:
     o 189 brand-name drugs (187 single-source and 2 multiple-source), and
     o 5 generic drugs.

1We also excluded data on 5 drugs from 1 state and 1 drug each from 2
states due to data reliability concerns.

  Scope and Methodology

Therapeutic Classification of Drug Basket

                              Antiasthmatics 12 6%

Therapeutic Classification of Drug Basket
Therapeutic class                  Number of drugs       Portion of basket 
Psychotherapeutic                                 47                   24% 
Antiinfectives/Miscellaneous                      18                    9% 
Central Nervous System                            18                    9% 
Cardiovascular                                    16                    8% 

                               Unclassified 11 6%

                   Hypoglycemics 11 6% Gastrointestinal 9 5%

                      Analgesics 8 4% Antiarthritics 7 4%

                                 Hormones 7 4%

                              Antihistamines 5 3%

                              Blood Products 5 3%

                                  Other 20 10%

    Total 194 100%

Source: GAO classification of 2003 CMS data using 2005 First DataBank
definitions. Notes: Therapeutic classes with four or fewer drugs were
collapsed into the "Other" class. Percentages do not add to 100 due to
rounding.

We selected 5 states for analysis to include a range of payment levels
based on the states' use of a percentage discount off of AWP to estimate
drug acquisition cost.

    States Selected for Analysis

Formula used to estimate drug acquisition cost, State as of 2003

                             Montana AWP minus 15%

                               Utah AWP minus 15%

                           Mississippi AWP minus 12%

                           Pennsylvania AWP minus 10%

South Carolina AWP minus 10%

Source: CMS.

                             Scope and Methodology

                        Selection of Market-Based Prices

We selected 3 market-based prices that are based on actual sales
transactions.

     o Average Manufacturer Price (AMP) and Best Price are currently used by
       the Medicaid program to calculate drug rebates.2
     o Federal Supply Schedule (FSS) Price represents prices available to
       certain federal government purchasers.

2To help control Medicaid spending on drugs, the Omnibus Budget
Reconciliation Act of 1990 established the Medicaid drug rebate program.
Under this program, a pharmaceutical manufacturer pays rebates to states
in order for federal payments to be available under 12 Medicaid for the
manufacturer's outpatient prescription drugs.

Average Manufacturer Price (AMP) is the average price paid to a
manufacturer by a wholesaler for drugs distributed to the retail pharmacy
class of trade. Transactions used to calculate AMP are required to reflect
cash discounts and other price adjustments that affect the price actually
realized.

     o AMP is calculated from actual sales transactions.
     o AMP price determination methods vary across manufacturers.
     o Manufacturers report AMP data to CMS on a quarterly basis.
     o AMP data are not publicly available.
     o Retail pharmacies may be unable to purchase drugs at AMP.

                             Scope and Methodology

                         Market-Based Price: Best Price

Best Price is the lowest price the manufacturer sells the drug to any
purchaser in any pricing structure, including capitated payments, with
some exceptions. Best Price is required to be reduced to account for price
adjustments such as discounts and rebates.

     o Best Price is calculated from actual sales transactions.
     o Best Price determination methods vary across manufacturers.
     o Manufacturers report Best Price data to CMS on a quarterly basis.
     o Best Price data are not publicly available.
          * Retail pharmacies may be unable to purchase drugs at Best Price.
          * Federal Supply Schedule (FSS) Price is intended to equal or
            better the prices manufacturers charge their most favored
            commercial customers under comparable terms and conditions. On
            behalf of the federal government, the VA negotiates this price
            with manufacturers.
     o All direct federal purchasers of pharmaceuticals may purchase drugs at
       the FSS Price, but other lower prices may be available to the largest
       federal purchasers. Medicaid is not a direct purchaser of drugs.
     o FSS Price is negotiated based on actual sales transactions to
       manufacturers' most favored commercial customers.
     o Manufacturers report most favored commercial customer pricing data to
       VA.
     o Manufacturers must list their brand-name drugs on the FSS in order to
       receive payment for drugs covered by Medicaid.
     o FSS Price data are publicly available.
     o Retail pharmacies may be unable to purchase drugs at FSS Prices.
     o Findings are not generalizable to states or drugs not included in our
       analysis.
     o Analysis did not consider all mechanisms states may use to control the
       costs of prescription drugs in their Medicaid programs, such as the
       collection of rebates through federal and state programs and policies
       on the mandatory use of generics.
          * Analysis did not examine drug utilization and therefore does not
            estimate cost savings for the Medicaid program.
          * For the 2003 data analyzed, we found that:
     o Minimal variation existed among the 5 states' payments for most drugs.
     o The 5 states' payments exceeded the 3 market-based prices for the
       brand-name drugs we reviewed.
     o Brand-name drug payments varied less than 7 percent across the 5
       states on average.
     o Generic drug payments varied 30 percent across the 5 states on
       average.
     o Gastrointestinal drug payments varied most across the 5 states on
       average, among the therapeutic classes.
          * State payment levels aligned with their respective formulas for
            estimating drug acquisition cost.
          * For the 189 brand-name drugs we reviewed,
     o The highest state payment exceeded the lowest state payment by 7
       percent, on average.
     o Payments for 50 percent of these drugs differed by 6 percent or less.
     o Payments for 75 percent of these drugs differed by 7 percent or less.
     o Payments for 95 percent of these drugs differed by 15 percent or less.
          * Payments for 1 drug varied more than 26 percent.
          * For the 5 generic drugs we reviewed,
     o The highest state payment exceeded the lowest state payment by 30
       percent, on average.

  Minimal Variation in States' Payments for Most Drugs

Payments for Gastrointestinal Drugs Varied Most

  Percent Difference in the 5 States' 2003 Drug Payments, by Therapeutic Class

Number                           Average difference between states' lowest
of drugs    Therapeutic class     payment and states' highest payment 
           9   Gastrointestinal                                           17% 

8     Analgesics                                                       11% 
11    Unclassified                                                     10% 
12    Antiasthmatics                                                    9% 
18    Antiinfectives/Miscellaneous                                      8% 
47    Psychotherapeutic                                                 8% 
20    Other                                                             8% 

11    Hypoglycemics                                                     7% 
18    Central Nervous System                                            7% 
16    Cardiovascular                                                    7% 

                                 7 Hormones 6%

                              5 Blood Products 5%

                              7 Antiarthritics 4%

5 Antihistamines 4%

Source: GAO analysis of 2003 state data using 2005 First DataBank
classifications.

                            Enclosure I Enclosure I

              Minimal Variation in States' Payments for Most Drugs

      States' Payment Levels Aligned with their Acquisition Cost Formulas

    Level of State Payment for Drugs in 2003, by State

Among the 5 states, the number of drugs for which each state's payment was

             Formula used to             The lowest   Less than   The highest
               estimate drug   Number   state          states'     state   
           acquisition cost,  of drugs  payment        average     payment 
State       as of 2003     reviewed                 payment             
Montana     AWP minus 15%        194          112         180            1 

Utah AWP minus 15% 193 28 174

                     Mississippi AWP minus 12% 193 17 91 22

Pennsylvania                     AWP minus 10%      194     7    9     113 
South Carolina                   AWP minus 10%      189    30    65     57 
Source: GAO analysis of 2003 state data.                             

Note: States with equivalent formulas for estimating drug acquisition cost
do not necessarily pay the same amount for each drugbecause payments are
determined by the lower of the state's estimate of drug acquisition cost
or the usual and customary charge; for certain drugs, the FUL or the state
MAC may apply if lower.

                            Enclosure I Enclosure I

              Minimal Variation in States' Payments for Most Drugs

      States' Payment Levels Aligned with their Acquisition Cost Formulas

             Variation in State Payment for Drugs in 2003, by State

     Formula used to          Among the 5 states, the number of drugs for
                              which each  
       estimate drug  Number  state's payment exceeded the lowest state
                              payment by  
acquisition cost, of drugs 5% or less    > 5-10%     >10-20%    More than  
State  as of 2003 reviewed                                     20%         

                      Montana AWP minus 15% 194 178 5 6 5

                        Utah AWP minus 15% 193 172 8 9 4

                   Mississippi AWP minus 12% 193 155 12 21 5

                   Pennsylvania AWP minus 10% 194 81 101 5 7

South Carolina AWP minus 10% 189 117 66 5 1

Source: GAO analysis of 2003 state data.

Note: States with equivalent formulas for estimating drug acquisition cost
do not necessarily pay the same amount for each drug because payments are
determined by the lower of the state's estimate of drug acquisition cost
or the usual and customary charge; for certain drugs, the FUL or the state
MAC may apply if lower.

Among the 5 states we reviewed,

     o Medicaid payments were the highest for nearly all brand-name drugs in
       our basket.
          * States' 2003 average payments for brand-name drugs were, on
            average:
               o 12 percent higher than AMP.
               o 36 percent higher than Best Price.
               o 73 percent higher than FSS Price.

Among the 5 states we reviewed,

     o Each state's payments exceeded market-based prices for nearly all
       brand-name drugs in 2003.3
     o Each state's payments exceeded market-based prices for brand-name
       drugs, on average.

Average Percent by which State Payments Exceeded Market-Based Prices for
Brand-Name Drugs in 2003, by State

Formula used to estimate

drug acquisition cost, AMP Best Price FSS Price State as of 2003

                       Montana AWP minus 15% 10% 33% 69%

                         Utah AWP minus 15% 10% 34% 70%

                     Mississippi AWP minus 12% 13% 36% 73%

Pennsylvania                      AWP minus 10%         15%    39%     77% 
South Carolina                    AWP minus 10%         13%    37%     74% 
Source: GAO analysis of 2003 state, CMS and VA data.                 

3Specifically, state payments exceeded market-based prices for all drugs
we reviewed except for the following cases: Mississippi's payments
exceeded AMP for all but 1 drug and exceeded Best Price for all but 1
drug; Pennsylvania's payments exceeded AMP for all 25 but 3 drugs and
exceeded Best Price for all but 1 drug; and South Carolina's payments
exceeded AMP for all but 2 drugs.

Among the 5 states we reviewed,

     o States' average payments for brand-name drugs exceeded all 3
       marketbased prices we reviewed.
          * AMP, Best Price and FSS Price were lower than states' average
            payments for brand-name drugs. Among these prices,
               o FSS Price was the lowest price for 164 drugs.
               o Best Price was the lowest price for 25 drugs.

For the 189 brand-name drugs we reviewed,

     o States' average payments exceeded AMP by 12 percent, on average.
     o States' average payments for 50 percent of these drugs exceeded AMP by
       11 percent or less.
     o States' average payments for 75 percent of these drugs exceeded AMP by
       13 percent or less.
          * States' average payments for 1 drug exceeded AMP by more than 30
            percent.
          * For the 189 brand name drugs we reviewed,
     o States' average payments exceeded Best Price by 36 percent, on
       average.
     o States' average payments for 50 percent of these drugs exceeded Best
       Price by 28 percent or less.
     o States average payments for 75 percent of these drugs exceeded Best
       Price by 36 percent or less.
          * States' average payments for 6 drugs exceeded Best Price by more
            than 100 percent.
          * For the 187 brand name drugs we reviewed,4
     o States' average payments exceeded FSS Price by 73 percent, on average.
     o States' average payments for 50 percent of these drugs exceeded FSS
       Price by 65 percent or less.
     o States' average payments for 75 percent of these drugs exceeded FSS
       Price by 86 percent or less.
     o States' average payments for 29 drugs exceeded FSS Price by more than
       100 percent.

4FSS Prices were only available for 187 of the 189 brand-name drugs in our
basket.

                           Enclosure II Enclosure II

           Comments from the Centers for Medicare & Medicaid Services

GAO-06-69R States' Medicaid Payments for Prescription Drugs

                           Enclosure II Enclosure II

GAO-06-69R States' Medicaid Payments for Prescription Drugs

                          Enclosure III Enclosure III

GAO Contact and Staff Acknowledgments GAO Contact Kathleen M. King, (202)
512-7119 or [email protected] Acknowledgments In addition to the contact named
above, Debra Draper, Assistant Director; Jennie Apter; Robin Burke;
Jessica Cobert; Martha R. W. Kelly; Kevin Milne; Daniel S. Ries; and
Patricia Roy made key contributions to this report.

(290329)

      GAO-06-69R States' Medicaid Payments for Prescription Drugs

    GAO's Mission

The Government Accountability Office, the audit, evaluation and
investigative arm of Congress, exists to support Congress in meeting its
constitutional responsibilities and to help improve the performance and
accountability of the federal government for the American people. GAO
examines the use of public funds; evaluates federal programs and policies;
and provides analyses, recommendations, and other assistance to help
Congress make informed oversight, policy, and funding decisions. GAO's
commitment to good government is reflected in its core values of
accountability, integrity, and reliability.

The fastest and easiest way to obtain copies of GAO documents at no cost
is through GAO's Web site ( www.gao.gov) . Each weekday, GAO posts GAO
Reports and newly released reports, testimony, and correspondence on its
Web site. To

have GAO e-mail you a list of newly posted products every afternoon, go to
www.gao.gov and select "Subscribe to Updates."

                             Order by Mail or Phone

The first copy of each printed report is free. Additional copies are $2
each. A check or money order should be made out to the Superintendent of
Documents. GAO also accepts VISA and Mastercard. Orders for 100 or more
copies mailed to a single address are discounted 25 percent. Orders should
be sent to:

U.S. Government Accountability Office 441 G Street NW, Room LM Washington,
D.C. 20548

To order by Phone: Voice: (202) 512-6000 TDD: (202) 512-2537 Fax: (202)
512-6061

    To Report Fraud, Contact:

Web site: www.gao.gov/fraudnet/fraudnet.htm

    E-mail: [email protected]

Federal Programs Automated answering system: (800) 424-5454 or (202)
512-7470

Gloria Jarmon, Managing Director, [email protected] (202) 512-4400 U.S.
Government Accountability Office, 441 G Street NW, Room 7125 Relations
Washington, D.C. 20548

Paul Anderson, Managing Director, [email protected] (202) 512-4800

    Public Affairs

U.S. Government Accountability Office, 441 G Street NW, Room 7149
Washington, D.C. 20548

      PRINTED ON

RECYCLED PAPER
*** End of document. ***