Prescription Drugs: Oversight of Drug Pricing in Federal Programs
(09-FEB-07, GAO-07-481T).					 
                                                                 
Several federal programs help pay for or reduce the costs of	 
prescription drugs for eligible individuals and entities. Three  
examples are the Medicaid drug rebate program, part of the joint 
federal-state Medicaid program that finances medical services for
certain low-income people; the 340B drug pricing program, which  
provides discounted drug prices to certain eligible entities such
as community health centers; and the Medicare Part D program,	 
which provides a Medicare drug benefit for the elderly and	 
certain disabled people. The price information drug manufacturers
report under these federal programs affects related federal	 
spending. Spending is also affected by the extent to which	 
federal oversight ensures the accuracy of this information. GAO  
was asked to provide information related to the oversight of	 
prescription drug pricing practices that affect these federal	 
programs. This testimony focuses on the oversight of drug pricing
related to the three programs and the implications for future	 
congressional oversight. This testimony is based on recent GAO	 
reports examining these programs and related work by the	 
Department of Health and Human Services Office of Inspector	 
General and others.						 
-------------------------Indexing Terms------------------------- 
REPORTNUM:   GAO-07-481T					        
    ACCNO:   A65744						        
  TITLE:     Prescription Drugs: Oversight of Drug Pricing in Federal 
Programs							 
     DATE:   02/09/2007 
  SUBJECT:   Beneficiaries					 
	     Congressional oversight				 
	     Medicaid						 
	     Medicare						 
	     Pharmaceutical industry				 
	     Prescription drugs 				 
	     Prices and pricing 				 
	     Program abuses					 
	     Program evaluation 				 
	     Executive agency oversight 			 
	     Transparency					 
	     340B Drug Pricing Program				 
	     Medicaid Drug Rebate Program			 
	     Medicare Part D					 

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GAO-07-481T

   

     * [1]Background

          * [2]The Medicaid Drug Rebate Program
          * [3]The 340B Drug Pricing Program
          * [4]The Medicare Part D Program

     * [5]Oversight Inadequacies in the Medicaid Drug Rebate Program R
     * [6]Oversight Inadequacies and Lack of Transparency in the 340B
     * [7]Medicare Part D Shares Features with Other Federal Programs
     * [8]Potential Areas for Future Congressional Oversight
     * [9]GAO Contacts and Acknowledgments

          * [10]Order by Mail or Phone

Testimony

Before the Committee on Oversight and Government Reform, House of
Representatives

United States Government Accountability Office

GAO

For Release on Delivery Expected at 10:00 a.m. EST

Friday, February 9, 2007

PRESCRIPTION DRUGS

Oversight of Drug Pricing in Federal Programs

Statement of John E. Dicken Director, Health Care

GAO-07-481T

Mr. Chairman and Members of the Committee:

I am pleased to be here today as you examine prescription drug pricing
practices that affect federal programs that help pay for or reduce the
cost of prescription drugs, and the implications for future congressional
oversight of the programs. Spending on prescription drugs in this country
has risen by about 11 percent on average each year from 1998 through 2005
at retail outlets, faster than the average 7 percent yearly rate of
increase in total U.S. health expenditures for health care services and
supplies during the same period. Retail spending on prescription drugs
from all sources in 2005 totaled about $201 billion, of which the federal
government spent about $33 billion under various programs.^1 The federal
spending amount precedes the 2006 introduction of the Medicare
prescription drug benefit, known as Medicare Part D, which increased
federal spending on prescription drugs.^2 The amount the federal
government spends for prescription drugs is related in part to the price
information drug manufacturers report to federal programs. In addition,
federal oversight designed to ensure the accuracy of that price
information is an important part of the effort to control federal
spending.

To assist this committee as it develops its oversight agenda, you asked us
for information pertaining to federal agency oversight of prescription
drug pricing practices that affect the Medicaid drug rebate program, the
340B drug pricing program,^3 and the Medicare Part D program. Accordingly,
my testimony today will focus on the oversight of drug pricing related to
these three federal programs and the potential implications for future
congressional oversight. My remarks today are based primarily on our 2005
and 2006 reports examining federal programs that help pay for or reduce
the cost of prescription drugs, which were done in accordance with
generally accepted government auditing standards.^4 I will also refer to
related work by the Department of Health and Human Services Office of
Inspector General (OIG) and others.

^1Centers for Medicare & Medicaid Services (CMS), Trustees, National
Health Expenditure, Historical Data (Baltimore, Md: Centers for Medicare &
Medicaid Services, 2007),
http://www.cms.hhs.gov/NationalHealthExpendData/02_NationalHealthAccountsHistorical.asp
(accessed Jan. 9, 2007). The prescription drug spending figures reflect
spending on prescription drugs through retail outlets, such as retail
pharmacies, but do not account for spending through nonretail outlets,
such as inpatient hospital or nursing home facility settings.

^2The total federal contribution to Medicare Part D for 2006 is estimated
at $58.3 billion, rising to $67.7 billion in 2007. See 2006 Annual Report
of the Boards of Trustees of the Federal Hospital Insurance and Federal
Supplementary Medical Insurance Trust Funds (Washington, D.C.: May 1,
2006).

^3The joint federal-state Medicaid program finances medical services for
certain low-income individuals. Within the Medicaid program, the Medicaid
drug rebate program requires participating drug manufacturers to pay
rebates to states as a condition of the federal contribution for covered
outpatient prescription drugs. The Medicaid and Medicaid drug rebate
programs are administered by the Centers for Medicare & Medicaid Services
(CMS). Another federal program, the 340B drug pricing program, requires
drug manufacturers that participate in the Medicaid program to provide
drugs at discounted prices to eligible entities such as community health
centers. The 340B drug pricing program is administered by the Health
Resources and Services Administration (HRSA).

In summary, oversight inadequacies by federal agencies and a lack of
transparency in drug pricing practices that affect federal programs have
important implications for federal spending on prescription drugs.
Regarding the Medicaid drug rebate program, we and others have reported
inadequacies in the Centers for Medicare & Medicaid Services' (CMS)
oversight of the price information reported by manufacturers to determine
the rebates owed to states, including a lack of clarity in CMS's guidance
to manufacturers for calculating that price information. Recent litigation
involving allegations that drug manufacturers reported inaccurate prices
to CMS resulted in several manufacturers agreeing to pay about $88
million, $257 million, and $345 million to states, thus highlighting the
potential for abuse under the program. CMS recently issued a proposed rule
intended to provide more clarity to manufacturers in determining the
prices they report to CMS.

We and others have also reported inadequacies in the Health Resources and
Services Administration's (HRSA) oversight of the 340B drug pricing
program, a lack of transparency in the 340B prices, and overpayments to
drug manufacturers. We reported in 2006 that HRSA did not routinely
compare the prices actually paid by eligible entities with the 340B prices
and that many entities we reviewed paid prices for drugs that were higher
than the 340B prices. Because 340B prices are not disclosed to the
eligible entities, the entities are unable to determine whether the prices
they pay are at or below the 340B prices. In addition, because 340B prices
are based on information reported by drug manufacturers for the Medicaid
drug rebate program, inaccuracies in that information may affect 340B
prices. HRSA has made changes to its oversight of the 340B drug pricing
program that are intended to address some of these concerns.

^4See GAO, Medicaid Drug Rebate Program: Inadequate Oversight Raises
Concerns About Rebates Paid to States, [11]GAO-05-102 (Washington, D.C.:
Feb. 4, 2005); GAO, Ryan White Care Act: Improved Oversight Needed to
Ensure AIDS Drug Assistance Programs Obtain Best Prices for Drugs,
[12]GAO-06-646 (Washington, D.C.: Apr. 26, 2006); and GAO, Medicare: CMS's
Implementation and Oversight of the Medicare Prescription Drug Discount
Card and Transitional Assistance Program, [13]GAO-06-78R (Washington,
D.C.: Oct. 28, 2005).

The Medicare Part D program shares in common with other federal programs
certain features that led to federal agency oversight challenges related
to the reporting of inaccurate price information in those programs. For
example, the Medicare Part D program relies on private organizations that
sponsor drug plans to calculate and report price information to CMS, much
like the Medicaid drug rebate program relies on drug manufacturers to
calculate and report drug pricing and price concession information to CMS.
Also, the Medicare Part D program relies on CMS's oversight to ensure that
price information reported to it by private organizations is accurate,
similar to the Medicaid drug rebate and 340B pricing programs. Other
features of the Medicare Part D program, such as its reliance on contracts
with multiple private insurers to provide drug coverage to beneficiaries
through a complex set of relationships and transactions with private
entities, also suggest areas of potential oversight vulnerability.

Although actions taken by both CMS and HRSA may address some of the
oversight inadequacies we and others have reported, it is too soon to know
how effective these actions have been in improving program oversight. Thus
concerns about oversight inadequacies, inaccurate price information, lack
of price transparency, and the potential for abuse associated with federal
programs that help pay for or reduce the cost of prescription drugs
suggest areas the Committee may wish to consider as it develops its
oversight agenda. For example, the Committee may wish to consider the
extent to which CMS and HRSA will take steps to systematically ensure the
accuracy of price information reported by private sector organizations
that participate in federal programs, and the extent to which cognizant
federal agencies will effectively monitor for and detect abuses in the
reporting of drug price information that affects the Medicaid drug rebate,
the 340B drug pricing, and the Medicare Part D programs.

Background

The Medicaid drug rebate program, the 340B drug pricing program, and the
Medicare Part D program help pay for or reduce the costs of prescription
drugs for eligible individuals and entities.

The Medicaid Drug Rebate Program

Medicaid is the joint federal-state program that finances medical services
for certain low-income adults and children. CMS, an agency of the
Department of Health And Human Services (HHS), administers and oversees
the program. While some benefits are federally required, outpatient
prescription drug coverage is an optional benefit that all states have
elected to offer. State Medicaid programs, though varying in design, cover
both brand and generic drugs. Retail pharmacies distribute drugs to
Medicaid beneficiaries, then receive reimbursements from states for the
acquisition cost of the drug and a dispensing fee. In 2004, Medicaid
outpatient prescription drug spending reached $31 billion, of which $19
billion was paid by the federal government.

To help control Medicaid drug spending, federal law requires manufacturers
to pay rebates to states as a condition for the federal contribution
toward covered outpatient prescription drugs.^5 Rebates manufacturers must
pay states for brand drugs under the Medicaid drug rebate program are
based on two prices that drug manufacturers must report to CMS: the
average manufacturer price (AMP) (the average price paid to a manufacturer
by wholesalers for drugs distributed to the retail pharmacy class of
trade) and best price (the lowest price available from the manufacturer to
any purchaser with certain exceptions).^6 Both amounts are to reflect
certain financial concessions that are available to drug purchasers. The
statute governing the program and the standard rebate agreement that CMS
signs with each manufacturer define AMP and best price and specify how
these prices are to be used to determine the rebates due to states. CMS
provides additional guidance to manufacturers regarding the calculation of
these amounts. After manufacturers report the required price information
to CMS, CMS uses it to calculate the rebate due for each unit of a brand
drug and reports this to the states. The state Medicaid programs use the
information to determine the amount of rebates to which they are entitled
from the manufacturers based on the volume of drugs paid for by the
programs.

^5See 42 U.S.C. S 1396r-8.

^6The basic unit rebate amount for a brand name drug is the difference
between best price and AMP or 15.1 percent of AMP, whichever is greater.

The 340B Drug Pricing Program

The 340B drug pricing program^7 gives more than 12,000 eligible entities
of various types--community health centers, disproportionate share
hospitals, and AIDS Drug Assistance Programs (ADAP)^8 among them--access
to discounted drug prices, called 340B prices. To access these prices,
entities must enroll in the program, which is administered by HRSA. Drug
manufacturers must offer covered drugs to enrolled entities at or below
340B prices in order to have their drugs covered by Medicaid.^9 Enrolled
entities may generally purchase drugs in two ways. They may choose the
direct purchase option to receive the 340B prices up front, or they may
choose the rebate option, typically purchasing drugs through a vendor and
later receiving a rebate from the manufacturer covering any amount they
paid above the 340B prices. Enrolled entities spent an estimated $3.4
billion on drugs in 2003.

To determine the 340B prices, HRSA uses a statutory formula that relies on
AMP and Medicaid rebate data that it receives from CMS.^10 Manufacturers
separately calculate the 340B prices for their drugs using the statutory
formula, and use these calculations as the basis for the prices they
charge eligible entities. HRSA does not share the 340B prices with the
eligible entities due to the statutory provisions regarding the
confidentiality of information used to determine them.^11

7The 340B drug pricing program is named for the statutory provision
authorizing it, section 340B of the Public Health Service Act (codified at
42 U.S.C. S 256b).

^8Among other services, community health centers offer primary and
preventive health services to low-income individuals. Disproportionate
share hospitals are hospitals that serve a relatively large volume of
low-income patients and are eligible for payment adjustments under
Medicare or Medicaid. ADAPs purchase HIV/AIDS drugs for enrolled
low-income people who are uninsured or underinsured.

^9If a drug manufacturer fails to sell drugs at or below the 340B prices,
it can be dropped as a participating drug provider in the 340B and
Medicaid programs.

^10In general, the 340B price for a covered outpatient drug is based on
AMP and the total unit rebate amount for the drug. HRSA began calculating
the 340B prices on October 1, 2005. Previously, CMS performed the
calculations.

^11According to OIG, the confidentiality provision in the Medicaid drug
rebate program statute related to AMP has been interpreted to mean that
HRSA may not reveal the 340B prices to the entities. Testimony of Stuart
Wright, Deputy Inspector General for Evaluation and Inspections, Office of
Inspector General, U.S. Department of Health and Human Services, before
the House Committee on Energy and Commerce Subcommittee on Oversight and
Investigations, December 15, 2005.

The Medicare Part D Program

The Medicare Prescription Drug, Improvement, and Modernization Act of 2003
(MMA) created a voluntary outpatient prescription drug benefit effective
January 1, 2006, as Part D of the Medicare program.^12 Under Part D,
Medicare beneficiaries may choose a prescription drug plan (PDP) from
multiple competing PDPs offered by private organizations, often private
insurers, that sponsor the plans. PDP sponsors enter into contracts with
CMS, the agency that administers Medicare. PDPs may differ in the drugs
they cover, the pharmacies they use, and the prices they negotiate with
drug manufacturers and pharmacies. PDP sponsors may use pharmacy benefit
managers (PBM) to negotiate with drug manufacturers and retail pharmacies
for the prices of the drugs that each PDP covers.^13,14 PDP sponsors are
required to report to CMS the price concessions they negotiate; these
price concession include discounts, rebates, direct or indirect subsidies,
and direct or indirect remunerations.

^12Pub. L. No. 108-173, S 101, 117 Stat. 2066, 2071-2152 (codified at 42
U.S.C. SS 1395w-101 to 1395w-152). MMA redesignated the previous Part D of
title XVIII of the Social Security Act as Part E and inserted a new Part D
after Part C.

^13In the private health insurance market, health plans typically contract
with PBMs to help manage their prescription drug benefits. PBMs negotiate
rebates or payments with drug manufacturers, encourage substitution of
generic drugs for therapeutically similar brand drugs, and negotiate
discounted prices with networks of retail and mail-order pharmacies,
passing along at least some of the savings to health plans and enrollees.
PBMs influence price negotiations with manufacturers through formulary
development and management and through the large market share they often
represent.

^14MMA prohibits the Secretary of Health and Human Services from
interfering with price negotiations between PDP sponsors and drug
manufacturers and pharmacies. Pub. L. No. 108-173, S 101, 117 Stat. 2066,
2098 (codified at 42 U.S.C. S 1395w-111(i)).

Oversight Inadequacies in the Medicaid Drug Rebate Program Raise Concerns about
the Accuracy of Rebates Paid to States

We and others have reported inadequacies in CMS's oversight of the price
information reported by manufacturers under the Medicaid drug rebate
program, including a lack of clarity in CMS's guidance to the
manufacturers for calculating prices. We reported in 2005 that CMS
conducted only limited checks for errors in manufacturer-reported drug
prices and that it did not generally review the methods and underlying
assumptions that manufacturers use to determine AMP and best prices.^15 We
also noted in that report that OIG found that CMS did not provide clear
program guidance for manufacturers to follow when determining those
prices--for example, how to treat sales to certain health maintenance
organizations (HMO) and PBMs.^16 OIG stated that its review efforts were
hampered by unclear CMS guidance on how manufacturers were to determine
AMP, a lack of manufacturer documentation, or both. Our review also
examined the pricing methodologies of several large drug manufacturers and
found considerable variation in the methods they used to determine AMP and
best price, and some of these differences could have affected the accuracy
of these prices and thereby reduced or increased rebates to state Medicaid
programs. OIG similarly identified problems with manufacturers' price
determination methods and their reported prices in four reports issued
from 1992 to 2001.^17

Recent litigation has highlighted the importance of the accuracy of prices
manufacturers report to CMS and the rebates they pay to states. For
example, two drug manufacturers agreed to pay about $88 million and $257
million, respectively, to states in 2003 to settle allegations that they
failed to include in their best price determinations certain sales to an
HMO.^18 Another manufacturer agreed to pay $345 million to states in 2004
to settle several allegations, including that it did not account for drug
discounts provided to two health care providers, resulting in an
overstated best price for one of its top-selling drugs and reduced state
rebates.^19

15See GAO, Medicaid Drug Rebate Program: Inadequate Oversight Raises
Concerns about Rebates Paid to States, [14]GAO-05-102 (Washington, D.C.:
Feb. 4, 2005).

^16When the Medicaid drug rebate program began in 1991, PBMs played a much
smaller role in the market.

^17See Department of Health and Human Services, Office of Inspector
General, Medicaid Drug Rebates: The Health Care Financing Administration
Needs to Provide Additional Guidance to Drug Manufacturers to Better
Implement the Program, A-06-91-00092 (Washington, D.C.: November 1992) and
Medicaid Drug Rebates: Sales to Repackagers Excluded from Best Price
Determinations, A-06-00-00056 (Washington, D.C.: March 2001). The other
two reports focused on individual manufacturers and are not publicly
available. Federal law permits the Secretary of Health and Human Services
to verify manufacturer-reported prices, and the Secretary has delegated
that authority to OIG. OIG regularly conducts audits, evaluations, and
investigations pertaining to HHS programs.

^18Department of Health and Human Services and Department of Justice,
Health Care Fraud and Abuse Control Program Annual Report for FY 2003
(Washington, D.C.: 2004).

CMS issued a proposed rule in December 2006^20 to, among other things,
implement provisions of the Deficit Reduction Act of 2005^21 (DRA) related
to prescription drugs under the Medicaid program. This rule is intended to
provide more clarity to manufacturers in determining AMPs reported to CMS,
by indicating which sales, discounts, rebates, and price concessions are
to be included or excluded. For example, it specifies that sales to PBMs
and mail-order pharmacies must be included in AMP. The proposed rule also
specifies that best price must include sales to all purchasers, including
HMOs, that are not explicitly excluded and specifies the prices that must
be included or excluded from those sales. Recognizing the evolving
marketplace for the sale of prescription drugs, the proposed rule states
that CMS plans to issue future clarifications of AMP and best price in an
expeditious manner. In its notice of proposed rulemaking, CMS also
referred to the DRA requirement that CMS disclose AMP data to states and
post these data on a public Web site. AMP data are currently not made
public. The changes represented by this proposed rule would likely affect
the prices that manufacturers report to the federal government. Only after
these regulations are finalized and implemented will there be an
opportunity to assess the extent to which they improve the accuracy of
prices reported and rebates paid by manufacturers.

^19Department of Health and Human Services and Department of Justice,
Health Care Fraud and Abuse Control Program Annual Report for FY 2004
(Washington, D.C.: September 2005).

^2071 Fed. Reg. 77174 (Dec. 22, 2006).

^21Pub. L. No. 109-171, SS 6001-6003, 120 Stat. 4, 54-61.

Oversight Inadequacies and Lack of Transparency in the 340B Drug Pricing Program
Raise Concerns about Overpayments to Drug Manufacturers

We and others have reported inadequacies in HRSA's oversight of the 340B
drug pricing program, problems related to the lack of transparency in the
340B prices, and overpayments to drug manufacturers. OIG recently reported
that some of the 340B prices that HRSA calculated were inaccurate and that
HRSA did not systematically compare the 340B prices with those that were
separately calculated by drug manufacturers for consistency.^22 In
addition, we recently reported that HRSA did not routinely compare 340B
prices with prices paid by certain eligible entities. We and OIG both
found that many entities reviewed paid prices for drugs that were higher
than the 340B prices.^23 OIG estimated that 14 percent of total drug
purchases made by entities in June 2005 exceeded the 340B prices,
resulting in $3.9 million in overpayments. We also found that the prices
of the eligible entities using the rebate option reported to HRSA did not
reflect all rebates they later received from manufacturers, and thus we
could not determine whether these entities paid prices that were at or
below the ceiling established by the 340B prices. Because the 340B prices
are not disclosed to eligible entities, the entities cannot know how the
prices they pay compare with the 340B prices. Finally, because 340B prices
are based on AMP and Medicaid drug rebate data, inaccuracies in those
amounts affect the 340B drug pricing program.

Recent legal settlements related to drug manufacturers' overstatement of
best prices used in the Medicaid rebate program also led to settlements
related to the 340B program. This was because overstated best prices could
affect rebates and result in inaccurate 340B prices.

HRSA has made changes to its oversight of the 340B drug pricing program
that are intended to address some of the concerns we and OIG raised in our
respective reports. For example, while manufacturers are not required to
submit their calculated 340B prices to HRSA, the agency has requested that
each manufacturer voluntarily submit its calculated 340B prices for
comparison to the 340B prices calculated by HRSA.^24 It has also indicated
that it was planning to develop systems to allow eligible entities to
check that the drug prices they are charged are appropriate while still
maintaining the confidentiality of those prices. Because AMP is used to
calculate 340B prices, the requirement under DRA that AMP become publicly
available may enable HRSA to improve the transparency of these prices.
However, the public reporting of AMP, which is only one element of the
340B price calculation, can only partially improve the transparency of
340B prices.

^22See Department of Health and Human Services, Office of Inspector
General, Deficiencies in the Oversight of the 340B Drug Pricing Program,
OEI-05-02-00072 (Washington, D.C.: October 2005), and Review of 340B
Prices, OEI-05-02-00073 (Washington, D.C.: July 2006).

^23See GAO, Ryan White Care Act: Improved Oversight Needed to Ensure AIDS
Drug Assistance Programs Obtain Best Prices for Drugs, [15]GAO-06-646
(Washington, D.C.: Apr. 26, 2006). We found that in 2003, all of the ADAPs
we reviewed that used the direct purchase option reported paying prices
higher than the 340B prices for at least 1 of the top 10 HIV/AIDS drugs
purchased in 2003.

^24HRSA indicated that as of July 2006, more than 50 manufactures had
submitted their data.

Medicare Part D Shares Features with Other Federal Programs and Has Certain
Features That Suggest Potential Oversight Challenges

The Medicare Part D program shares in common certain features with other
federal programs that help pay for or reduce the cost of prescription
drugs. Because these features presented oversight challenges with other
programs, they may also present challenges for Part D. Some of the common
features include the following:

           o Under Medicare Part D, PDP sponsors are required to calculate
           and report to CMS aggregate price concessions they negotiate.
           Similarly, the Medicaid drug rebate program requires manufacturers
           to calculate and report certain price information to CMS and to
           include various price concessions in the calculations.

           o Medicare Part D relies on PDP sponsors to pass on to
           beneficiaries the benefit of price concessions they negotiate with
           drug manufacturers. Similarly, the Medicaid drug rebate and 340B
           drug pricing programs rely on manufacturers to pass on to states
           or eligible entities the rebates or discounted prices to which
           they are entitled under the programs.

           o Medicare Part D relies on CMS to audit PDP sponsors to ensure
           proper disclosure of price concessions negotiated with
           manufacturers. Similarly, the Medicaid drug rebate and 340B drug
           pricing programs rely on federal audits of manufacturers to ensure
           that the prices reported and charged are appropriate.

           Further, the Medicare Part D program shares in common with the
           Medicare prescription drug discount card program--which preceded
           Part D--features related to oversight inadequacies we identified
           with the discount card program. Under the discount card program,
           private sponsors negotiated drug discounts for beneficiaries and
           required the card sponsors to report price concessions they
           received for drugs and pass a share of these on to beneficiaries.
           We reported in 2005 that some card sponsors found that the
           guidance relating to the reporting of price concessions provided
           by CMS lacked clarity, and CMS reported that the quality of price
           concession data provided by card sponsors was questionable, with
           problems such as missing data.^25

           Two other features of the Medicare Part D program suggest
           potential oversight challenges. The first relates to the
           transition of the nearly 6 million typically high-cost individuals
           who qualify for both Medicaid and Medicare--referred to as dual
           eligibles--from Medicaid to Medicare Part D for prescription drug
           coverage. While the Medicaid drug rebate program is designed to
           help control prescription drug spending by requiring manufacturers
           to pay rebates to states, Medicare Part D relies on PDP sponsors
           to negotiate drug prices, including price concessions. Part D
           provides no assurance that the PDP sponsors will be able to
           negotiate price concessions that are as favorable as the rebates
           required under the Medicaid program. It is not yet known how the
           federal cost of prescription drug coverage for dual eligibles
           under Part D will compare with the costs incurred for these
           individuals under Medicaid.

           The second feature relates to the Part D program's reliance on
           contracts with private PDP sponsors. The PDP sponsors provide
           prescription drug coverage to beneficiaries through a complex set
           of relationships and transactions among insurers, PBMs, and drug
           manufacturers. These relationships have similarities to the
           Federal Employees Health Benefits Program (FEHBP), the health care
           program for federal employees, in which the federal government
           contracts with private organizations to provide drug benefits, and
           these organizations often contract with PBMs to negotiate with
           manufacturers and provide other administrative and clinical
           services.^26 The relationships and transactions between PBMs and
           drug manufacturers within FEHBP and other federal programs have
           been the subject of litigation. For example, a large PBM agreed to
           pay about $138 million to the federal government in 2005,
           including about $55 million to the FEHBP, to settle allegations
           that it had received payments from drug manufacturers in exchange
           for marketing certain drugs made by those manufacturers to
           providers who are reimbursed by federal programs.^27
			  
			  Potential Areas for Future Congressional Oversight

           Although actions taken by both CMS and HRSA may address some of
           the oversight inadequacies we and others have reported, it is too
           soon to know how effective these have been in improving program
           oversight. Thus, concerns about prescription drug pricing
           inaccuracies in the Medicaid drug rebate and 340B drug pricing
           programs and overpayments to drug manufacturers highlight the
           importance of federal oversight of prices reported by drug
           manufacturers under these programs. Because the new Medicare Part
           D program shares certain features in common with these programs,
           oversight of the price information reported under Part D is
           important as well. As the Committee develops its oversight agenda
           relating to federal programs that help pay for or lower the costs
           of prescription drugs, it may wish to consider the following
           areas.

           o The extent to which federal agencies will take steps to
           systematically ensure the accuracy of price data associated with
           federal programs, specifically,

                        o the extent to which CMS will ensure that AMP and
                        best prices reported by manufacturers under the
                        Medicaid drug rebate program include all appropriate
                        transactions and price concessions--particularly once
                        the proposed rule is finalized;

                        o the extent to which HRSA will ensure the
                        completeness and accuracy of the 340B prices it
                        maintains, obtain final prices paid by all covered
                        entities, and more systematically compare prices paid
                        by entities with the 340B prices; and

                        o the measures CMS will take to ensure that the price
                        information Part D sponsors report to CMS include
                        aggregate price concessions sponsors negotiate with
                        PBMs and drug manufacturers.

           o Recognizing the evolving nature of purchasers and sellers in the
           prescription drug market, the extent to which CMS will be
           effective in updating and revising Medicaid drug rebate program
           pricing guidance for manufacturers as circumstances warrant.

           o The extent to which the transition of dual eligibles from
           Medicaid to Medicare Part D will affect federal spending.

           o The extent to which cognizant federal agencies will monitor for
           and detect abuses in the reporting of drug price information that
           affects federal programs.
			  
^25See GAO, Medicare: CMS's Implementation and Oversight of the Medicare
Prescription Drug Discount Card and Transitional Assistance Program,
[23]GAO-06-78R (Washington, D.C.: Oct. 28, 2005). To assist Medicare
beneficiaries with their prescription drug costs before the new benefit
became available, the MMA required the establishment of a temporary
Medicare Prescription Drug Discount Card and Transitional Assistance
Program, which began in June 2004. See Pub. L. No. 108-173, S 101, 117
Stat. 2066, 2131. The drug discount card program offered Medicare
beneficiaries access to discounts off the retail price of prescription
drugs at the point of sale. The program was discontinued when the new Part
D drug benefit became available in 2006.

^26FEHBP covers about 8 million federal employees, retirees, and their
family members, making it the largest employer-based health insurance
program in the country. In 2003 we reported on the relationships between
the private insurers that provide coverage to federal employees under the
FEHBP and the PBMs that administer the prescription drug benefit for most
FEHBP enrollees. See GAO, Federal Employees' Health Benefits: Effects of
Using Pharmacy Benefit Managers on Health Plans, Enrollees, and
Pharmacies, [24]GAO-03-196 (Washington, D.C.: Jan. 10, 2003).

^27Department of Health and Human Services and Department of Justice,
Health Care Fraud and Abuse Control Program Annual Report for FY 2005
(Washington, D.C.: August 2006), and the Office of Personnel Management,
Office of the Inspector General, Semiannual Report to Congress
(Washington, D.C.: Nov. 1, 2005).

           Mr. Chairman, this concludes my prepared remarks. I would be happy
           to answer any questions that you or other Members of the Committee
           may have.
			  
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Highlights of [26]GAO-07-481T , a testimony before the Committee on
Oversight and Government Reform, House of Representatives

February 9, 2007

PRESCRIPTION DRUGS

Oversight of Drug Pricing in Federal Programs

Several federal programs help pay for or reduce the costs of prescription
drugs for eligible individuals and entities. Three examples are the
Medicaid drug rebate program, part of the joint federal-state Medicaid
program that finances medical services for certain low-income people; the
340B drug pricing program, which provides discounted drug prices to
certain eligible entities such as community health centers; and the
Medicare Part D program, which provides a Medicare drug benefit for the
elderly and certain disabled people. The price information drug
manufacturers report under these federal programs affects related federal
spending. Spending is also affected by the extent to which federal
oversight ensures the accuracy of this information.

GAO was asked to provide information related to the oversight of
prescription drug pricing practices that affect these federal programs.
This testimony focuses on the oversight of drug pricing related to the
three programs and the implications for future congressional oversight.
This testimony is based on recent GAO reports examining these programs and
related work by the Department of Health and Human Services Office of
Inspector General and others.

Regarding the Medicaid drug rebate program, GAO and others have reported
inadequacies in the Centers for Medicare & Medicaid Services' (CMS)
oversight of the prices manufacturers report to CMS to determine the
statutorily required rebates owed to states. For example, GAO and others
have reported a lack of clarity in CMS's guidance to manufacturers for
calculating these prices. Several recent legal settlements under which
manufacturers agreed to pay hundreds of millions of dollars to states
because they were alleged to report inaccurate prices to CMS highlight the
potential for abuse under the program. CMS recently issued a proposed rule
intended to provide more clarity to manufacturers in determining the
prices they report.

GAO and others have reported inadequacies in the Health Resources and
Services Administration's (HRSA) oversight of the 340B drug pricing
program and problems related to the lack of transparency in the maximum
prices, called 340B prices, charged to eligible entities. GAO reported
that HRSA did not routinely compare the prices actually paid by certain
eligible entities with the 340B prices and that many of these eligible
entities paid prices higher than the 340B prices. Because these prices are
not disclosed to the entities, the entities are unable to determine
whether the prices they pay are at or below these prices. In addition,
because 340B prices are based on information reported by drug
manufacturers for the Medicaid drug rebate program, inaccuracies under
that program affect these prices. HRSA has made changes to its oversight
of the program intended to address some of these concerns.

The Medicare Part D program shares in common with other federal programs
certain features that led to federal agency oversight challenges. For
example, Part D relies on multiple private organizations to report to CMS
certain price concessions from manufacturers, similar to the Medicaid drug
rebate program. Also, Part D relies on CMS's oversight to ensure that
price information reported to it by private organizations are accurate,
similar to the Medicaid drug rebate and 340B drug pricing programs. Other
features of Part D, such as its reliance on contracts with private
insurers to provide drug coverage to beneficiaries through a complex set
of relationships and transactions with private entities, also suggest
potential oversight challenges.

Oversight inadequacies, inaccurate prices, lack of price transparency, and
the potential for abuse suggest areas the Committee may wish to consider
as it develops its oversight agenda. The Committee may wish to consider
the extent to which CMS and HRSA will systematically take steps to ensure
the accuracy of prices reported and charged by private organizations that
participate in federal programs. The Committee may also wish to consider
the extent to which federal agencies will effectively monitor for and
detect abuses in the reporting of drug price information that affect these
three federal programs.

References

Visible links
  11. http://www.gao.gov/cgi-bin/getrpt?GAO-05-102
  12. http://www.gao.gov/cgi-bin/getrpt?GAO-06-646
  13. http://www.gao.gov/cgi-bin/getrpt?GAO-06-78R
  14. http://www.gao.gov/cgi-bin/getrpt?GAO-05-102
  15. http://www.gao.gov/cgi-bin/getrpt?GAO-06-646
  23. http://www.gao.gov/cgi-bin/getrpt?GAO-06-78R
  24. http://www.gao.gov/cgi-bin/getrpt?GAO-03-196
  26. http://www.gao.gov/cgi-bin/getrpt?GAO-07-481T
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