Medicaid: Changes in Best Price for Outpatient Drugs Purchased by HMOs
and Hospitals (Fact Sheet, 08/05/94, GAO/HEHS-94-194FS).

Congress has tried to reduce Medicaid prescription drug costs by
requiring drug manufacturers to give state Medicaid programs rebates for
outpatient drugs. The rebates were based on the lowest or "best" prices
that drug manufacturers charged other purchasers, such as health
maintenance organizations (HMO) and hospitals.  Concerns have been
raised in Congress that drug manufacturers might try to minimize the
rebates to state Medicaid programs by increasing best prices and cutting
best price discounts for drugs purchased by HMOs and others. This fact
sheet (1) determines the changes in the best prices for the drugs bought
by the HMOs and group purchasing organizations GAO studied; (2)
determines the changes in the difference between the drugs' best prices
and their average prices, known as the "best price discount;" and (3)
compares the changes in the best prices with the changes in prices paid
by the HMOs and the group purchasing organizations.

--------------------------- Indexing Terms -----------------------------

 REPORTNUM:  HEHS-94-194FS
     TITLE:  Medicaid: Changes in Best Price for Outpatient Drugs 
             Purchased by HMOs and Hospitals
      DATE:  08/05/94
   SUBJECT:  Medicaid programs
             Drugs
             Price adjustments
             Hospitals
             Health care cost control
             Health care costs
             Health maintenance organizations
             Price regulation
             Pharmaceutical industry
             Cost analysis

             
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Cover
================================================================ COVER


Fact Sheet for the Chairman, Subcommittee on Regulation, Business
Opportunities, and Technology, Committee on Small Business, House of
Representatives

August 1994

MEDICAID - CHANGES IN BEST PRICE
FOR OUTPATIENT DRUGS PURCHASED BY
HMOS AND HOSPITALS

GAO/HEHS-94-194FS

Medicaid:  Changes in Best Price


Abbreviations
=============================================================== ABBREV

  AMP - average manufacturer price
  CBO - Congressional Budget Office
  GPO - group purchasing organization
  HHS - Department of Health and Human Services
  HMO - health maintenance organization
  OBRA - Omnibus Budget Reconciliation Act
  PPI - producer price index

Letter
=============================================================== LETTER


B-252845

August 5, 1994

The Honorable Ron Wyden
Chairman, Subcommittee on Regulation,
 Business Opportunities, and Technology
Committee on Small Business
House of Representatives

Dear Mr.  Chairman: 

In the Omnibus Budget Reconciliation Act of 1990 (OBRA), enacted
November 5, 1990, the Congress tried to reduce Medicaid's
prescription drug costs by requiring that drug manufacturers give
state Medicaid programs rebates for outpatient drugs.\1 The rebates
were based on the lowest or "best" prices that drug manufacturers
charged other purchasers, such as health maintenance organizations
(HMO) and hospitals.  You were concerned that, after OBRA, drug
manufacturers might try to minimize the rebates to state Medicaid
programs by increasing best prices and reducing best price discounts
for drugs purchased by HMOs and others. 

This fact sheet responds to your request that we (1) determine the
changes in the best prices for the drugs purchased by the HMOs and
group purchasing organizations (GPO)\2 we studied; (2) determine the
changes in the difference between the drugs' best prices and their
average prices, known as the "best price discount;" and (3) compare
the changes in the best prices with the changes in the prices paid by
the HMOs and GPOs. 


--------------------
\1 These are drugs that can be dispensed on an outpatient basis to
ambulatory patients, typically as capsules or tablets.  In contrast,
inpatient drugs are typically injectable drugs administered by
intramuscular or intravenous injections. 

\2 To study prices charged hospitals, we obtained prices from GPOs,
which typically represent many hospitals in negotiating prices with
drug manufacturers. 


   BACKGROUND
------------------------------------------------------------ Letter :1

Although Medicaid is the largest single payer for prescription drugs,
state Medicaid programs did not receive significant discounts on drug
prices before OBRA.  Medicaid had been paying near retail prices for
outpatient drugs, while other purchasers, such as HMOs and hospitals,
paid significantly lower prices.  State Medicaid programs' ability to
control drug costs was generally limited to restricting coverage,
increasing the beneficiary's share of costs, and reducing pharmacy
reimbursements. 

To help reduce Medicaid's drug costs, OBRA required that drug
manufacturers pay rebates on outpatient prescription drugs to state
Medicaid programs.  In general, the rebate amount equals the greater
of (1) a fixed percentage (12.5 percent in 1991 and 1992, 15 percent
after 1992) of the average manufacturer price (AMP)\3 or (2) the
difference between the AMP and the lowest price any purchaser paid
for that drug, called the drug's best price.  The percentage by which
a drug's best price is below its AMP is called the best price
discount.\4 The Department of Health and Human Services (HHS)
computes the rebate amounts based on the best price and AMP data that
manufacturers provide each quarter, and drug utilization information
that states provide. 

The Congress was concerned that after OBRA drug manufacturers might
increase prices to purchasers other than Medicaid.  Therefore, OBRA
required the Comptroller General to report on changes in prescription
drug prices that manufacturers charged these other purchasers.  In
January 1993, we reported that, although changes in the drug prices
paid by the HMOs and GPOs we studied varied considerably the year
after OBRA, price increases tended to be more common and more
significant for outpatient drugs than for inpatient drugs.\5 Although
our 1993 report covered only changes in the drug prices paid by the
HMOs and GPOs, this fact sheet focuses on changes in best prices and
best price discounts for the outpatient drugs purchased by the HMOs
and GPOs. 


--------------------
\3 The AMP is the average price paid to a manufacturer by retail
pharmacies or wholesalers for drugs distributed to the retail
pharmacy class of trade. 

\4 For example, a drug with an AMP of $10 minus its best price of $6
results in a best price discount of $4 or 40 percent below its AMP. 

\5 Medicaid:  Changes in Drug Prices Paid by HMOs and Hospitals Since
Enactment of Rebate Provisions (GAO/HRD-93-43, Jan.  15, 1993). 


   SUMMARY
------------------------------------------------------------ Letter :2

In the 2 years since OBRA became law, the average best price for the
outpatient drugs purchased by the HMOs and GPOs increased.  For both
years, the best price increased, on average, at a slightly faster
rate than the drugs' AMP or the producer price index (PPI) for
prescription drugs.\6

Because the drugs' average best price increased faster than their
AMP, the gap between average best price and AMP narrowed, resulting
in a decrease in the average best price discount.  By the first
quarter of 1993, the drugs' average best price discount--the average
percentage that the best price was below the AMP--had fallen to about
the minimum rebate amount required by OBRA of 15 percent of the AMP. 
(See sections I and II for additional information on changes in best
prices and best price discounts.)

   1> Figure 1:  Changes in Median
   Best Price Discounts for HMO
   and GPO Drugs, 1991 to 1993

   (See figure in printed
   edition.)

Figure 1 shows that, by the first quarter of 1993, the average best
price discount for the drugs purchased by the HMOs and GPOs had
fallen to about 14 and 15 percent, respectively.  The median best
price discount for the drugs purchased by the HMOs and GPOs decreased
about 6 percentage points from the first quarter of 1991 through the
first quarter of 1992.  For this period, the Congressional Budget
Office (CBO)\7 found the same decrease in the median best price
discount for the 100 outpatient drugs on which Medicaid spent the
most in fiscal year 1991.\8 The fall in the average best price
discount for the HMO and GPO drugs continued from the first quarter
of 1992 through the first quarter of 1993 as the median best price
discounts fell by about 4 and 7 percentage points, respectively.  By
the first quarter of 1993, the median best price discount for the
drugs purchased by the HMOs and GPOs approximated the minimum rebate
amount owed the Medicaid program. 

Because data on the drug prices paid by the HMOs and GPOs were
limited, we could not determine the extent to which the prices they
paid also changed during the entire 2-year period.  However, during
the last 6 months of 1991--the period for which we had both best
prices and purchase prices to compare--the average best price and
average purchase price for the drugs purchased by the HMOs and GPOs
changed little.  (See section III for additional information
comparing changes in best price and purchase price.)


--------------------
\6 The PPI for prescription drugs tracks changes in manufacturers'
prices for a market basket of prescription drugs over time. 

\7 "Questions and Answers:  Medicaid Prescription Drug Options," CBO
letter to the Chairman, House Committee on Energy and Commerce, June
22, 1992. 

\8 Of the drugs included in our study, 80 were on the Medicaid list
of 100 used by CBO. 


   SCOPE AND METHODOLOGY
------------------------------------------------------------ Letter :3

To determine how best prices and best price discounts have changed
for the drugs purchased by HMOs and hospitals, we used a list of
outpatient drugs purchased by the four HMOs and eight GPOs included
in our January 1993 report.\9 From this data, we determined the
number of HMO and GPO outpatient drugs that matched the drugs in HHS'
database of outpatient drugs covered under the rebate program.  This
gave us a list of 408 different drug products purchased by at least
one HMO or GPO.\10 For each product, HHS provided us the best price
and AMP for each quarter from the first quarter of 1991 through the
first quarter of 1993.\11

For the HMOs and GPOs, we analyzed outpatient drug price changes to
determine the

  differences in the rates of change between best price and AMP,

  changes in the percentage difference between best price and AMP to
     calculate changes in best price discounts, and

  differences in the rates of change between best prices and prices
     paid by the HMOs and GPOs. 

To help put the drug price changes in perspective, we compared them
with changes in the AMP for the drugs we studied and the PPI for
prescription drugs.  The AMP represents the average selling price to
HMOs, GPOs, and other large purchasers.  The PPI represents changes
in drug prices for another market basket of drugs. 

We reported changes in best price, AMP, best price discounts, and
prices paid by the HMOs and GPOs as median changes\12 because the
mean price changes were sensitive to a few drugs with relatively
large decreases and increases.  In addition, because of OBRA's
confidentiality provisions, this report contains no specific drug
prices--only percentage changes in prices--and price changes appear
in aggregate form rather than by individual drug. 

We did not try to determine the relationship between OBRA and changes
in prices paid by HMOs and GPOs, best prices, and best price
discounts.  Changes in market conditions, including the relative
strength of the purchasers' negotiating positions with drug
manufacturers and the pricing strategies of the manufacturers, may
have changed the prices paid by individual HMOs and GPOs as well as
best prices and best price discounts.  However, determining the
influence of such factors on market conditions is beyond the study's
scope. 

We did our work between July 1993 and January 1994 in accordance with
generally accepted government auditing standards. 


--------------------
\9 The HMOs cover about 22 percent of the approximate 38.6 million
U.S.  enrollees in HMOs; the GPOs cover about 55 percent of the
approximate 6,500 nonfederal U.S.  hospitals. 

\10 Drugs are purchased in different dosage amounts and package
sizes, which are considered individual drug products.  For example,
some drugs, such as Zantac, can be purchased in different dosage
amounts and package sizes; each drug form is considered a different
product. 

\11 Because more than one HMO or GPO may have purchased the same drug
product, each drug product purchased by an HMO or GPO was a unique
drug observation.  For the 408 products, we received about 800
observations. 

\12 Because only six of the HMOs and GPOs gave us drug utilization
data, the average price changes reported are unweighted. 


---------------------------------------------------------- Letter :3.1

We are sending copies of this fact sheet to the Health Care Financing
Administration and other interested parties.  Copies also will be
made available to others upon request. 

Should you or your staff have any questions on this fact sheet,
please contact John Hansen, Assistant Director, at (202) 512-7105 or
Joel Hamilton, Senior Evaluator, at (202) 512-7142.  Other
contributors to this fact sheet include Kevin Dooley and James
Cosgrove. 

Sincerely yours,

Leslie G.  Aronovitz
Associate Director, Health
 Financing Issues


CHANGES IN BEST PRICE, AMP, AND
THE PPI
=========================================================== Appendix 1

In the 2 years since OBRA became law, the increase in best prices for
the drugs purchased by the HMOs and GPOs slightly exceeded the rates
of change in the drugs' AMP and the PPI for prescription drugs.\13
The change in the median AMP for the drugs purchased by the HMOs and
GPOs was slightly less than the change in the median best price for
both years and about the same as the change in the PPI for the
period.  Figure 1.1 shows the median changes in best price, AMP, and
the PPI for (1) the first quarter of calendar year 1991 through the
first quarter of calendar year 1992 and (2) the first quarter of
calendar 1992 through the first quarter of calendar year 1993. 

   1.1> Figure 1.1:  Changes in
   Median Best Price, Median AMP,
   and the PPI for Prescription
   Drugs

   (See figure in printed
   edition.)

The range of best price changes for the drugs purchased by the HMOs
and GPOs varied considerably in both years.  Figures 1.2 through 1.5
show the distributions of the best price changes.  The shaded bars
represent the drugs that decreased in price or remained the same and
the white bars, the drugs that increased in price.  For example,
figure 1.2 shows that from 1991 to 1992, 17.3 percent of the HMO
drugs' best prices did not change, although 22.6 percent of drugs'
best prices increased up to 10 percent. 

   1.2> Figure 1.2:  Distribution
   of HMO Drugs' Best Price
   Changes, First Quarter 1991 to
   First Quarter 1992

   (See figure in printed
   edition.)

Range:  42 percent decrease to 210 percent increase

   1.3> Figure 1.3:  Distribution
   of HMO Drugs' Best Price
   Changes, First Quarter 1992 to
   First Quarter 1993

   (See figure in printed
   edition.)

Range:  43 percent decrease to 648 percent increase

A comparison of figures 1.2 and 1.3 shows that about the same number
of HMO drugs experienced increases in best price in both years.  From
1991 to 1992, about 71 percent of the HMO drugs increased compared to
about 77 percent from 1992 to 1993.  The number of drugs with large
price changes was about the same both years as well, with about 33
percent of the HMOs' drugs increasing more than 20 percent the first
year compared to about 30 percent the second year.\14 The only
notable differences in best price changes from one year to the next
were the higher number of drugs that increased and decreased 1 to 10
percent the second year. 

   1.4> Figure 1.4:  Distribution
   of GPO Drugs' Best Price
   Changes, First Quarter 1991 to
   First Quarter 1992

   (See figure in printed
   edition.)

Range:  95 percent decrease to 198 percent increase

   1.5> Figure 1.5:  Distribution
   of GPO Drugs' Best Price
   Changes, First Quarter 1992 to
   First Quarter 1993

   (See figure in printed
   edition.)

Range:  45 percent decrease to 656 percent increase

Figures 1.4 and 1.5 show that the GPOs had about the same percentage
of drugs with best price increases both years as did the HMOs.  From
1991 to 1992, about 74 percent of the GPOs' drugs increased in price
compared to about 77 percent from 1992 to 1993.  However, the number
of the GPOs' drugs that had large price increases the first year was
greater than the number the second year.  From 1991 to 1992, about 35
percent of the GPOs' drugs increased by more than 20 percent compared
to about 25 percent of the drugs from 1992 to 1993.  The GPOs had,
however, a greater percentage of drugs with increases from 1 to 10
percent in the second year. 


--------------------
\13 We determined changes in the PPI from data prepared by the Bureau
of Labor Statistics under commodity code 0635. 

\14 We defined a large price increase as one over 20 percent. 


CHANGES IN BEST PRICE DISCOUNTS
=========================================================== Appendix 2

In the 2 years since OBRA became law, changes in the best price
discounts for individual drugs varied widely.  The following figures
show the distributions of percentage changes in best price discounts
for the HMO and GPO outpatient drugs during both years. 

   2.1> Figure 2.1:  Distribution
   of HMO Drugs' Best Price
   Discount Changes, First Quarter
   1991 to First Quarter 1992

   (See figure in printed
   edition.)

Range:  104 percent decrease to 714 percent increase

   2.2> Figure 2.2:  Distribution
   of HMO Drugs' Best Price
   Discount Changes, First Quarter
   1992 to First Quarter 1993

   (See figure in printed
   edition.)

Range:  100 percent decrease to 623 percent increase

Figures 2.1 and 2.2 show the wide variance in changes in best price
discounts for the HMOs' drugs during both years.  From 1991 to 1992,
best price discounts decreased for about 61 percent of the drugs
compared with about 63 percent from 1992 to 1993.  Best price
discounts increased for about 35 percent of the drugs the first year
to about 36 percent the second year.  The number of drugs whose best
price discounts remained the same decreased from about 5 percent the
first year to about 1 percent the second. 

   2.3> Figure 2.3:  Distribution
   of GPO Drugs' Best Price
   Discount Changes, First Quarter
   1991 to First Quarter 1992

   (See figure in printed
   edition.)

Range:  454 percent decrease to 494 percent increase

   2.4> Figure 2.4:  Distribution
   of GPO Drugs' Best Price
   Discount Changes, First Quarter
   1992 to First Quarter 1993

   (See figure in printed
   edition.)

Range:  271 percent decrease to 623 percent increase

Figures 2.3 and 2.4 show that differences in best price discounts for
drugs purchased by the GPOs also varied widely.  From 1991 to 1992,
best price discounts decreased for about 62 percent of the GPOs'
drugs compared with about 52 percent from 1992 to 1993.  Best price
discounts increased for about 34 percent of the drugs the first year
to about 46 percent the second year.  The number of drugs whose best
price discount remained about the same decreased from about 5 percent
the first year to about 3 percent the second year. 


COMPARISON OF CHANGES IN BEST
PRICES AND PRICES PAID BY HMOS AND
GPOS
=========================================================== Appendix 3

In the last 6 months of 1991, the median best price for the
outpatient drugs purchased by the HMOs and GPOs increased slightly,
while the median purchase price remained constant for both groups. 
This period was the only one for which we had both purchase price and
best price data to compare.  Figure 3.1 shows the extent to which the
median best price for the HMOs and GPOs rose.  Figure 3.1 also shows
the relatively small change in the drugs' median AMP for the HMOs and
GPOs.  During the same 6-month period, the PPI for prescription drugs
increased 2.7 percent, a rate greater than the median change in
purchase price for both the HMOs and GPOs, but less than the median
change in best price and AMP for the two groups. 

   3.1> Figure 3.1:  Change in
   Median Best Price, Median AMP,
   and Median Purchase Price for
   HMO and GPO Drugs, July 1,
   1991, to January 1, 1992

   (See figure in printed
   edition.)

In addition, during the last 6 months of 1991, the percentage
difference between purchase price and best price decreased, on
average, for the drugs purchased by the HMOs and GPOs.\15 Figure 3.2
shows the change in the median percentage difference between purchase
price and best price. 

   3.2> Figure 3.2:  Median
   Percentage Difference Between
   Purchase Price and Best Price
   for HMO and GPO Drugs, July 1,
   1991, to January 1, 1992

   (See figure in printed
   edition.)

The difference between drug purchase price and best price decreased,
on average, about 4 percentage points for the drugs purchased by the
HMOs.  The drugs purchased by the GPOs had a similar change as the
median difference between purchase and best price decreased about 3.5
percentage points.  Figures 3.3 and 3.4 show the distribution of the
changes. 

   3.3> Figure 3.3:  Median
   Percentage Difference Between
   Purchase Price and Best Price
   for Individual HMOs' Drugs,
   July 1, 1991, to January 1,
   1992

   (See figure in printed
   edition.)

   3.4> Figure 3.4:  Median
   Percentage Difference Between
   Purchase Price and Best Price
   for Individual GPOs' Drugs,
   July 1, 1991, to January 1,
   1992

   (See figure in printed
   edition.)

Figures 3.3 and 3.4 show that most of the HMOs and GPOs had drug
purchase prices that, on average, were closer to best price by 1992. 
The decrease in the difference between purchase price and best price
ranged from about 7 to 9 percentage points for the HMOs' drugs and
about 7 to 14 percentage points for the drugs purchased by the GPOs. 
However, for one HMO and three GPOs, the difference between their
purchase prices and best prices increased.  Of these four purchasers,
figures 3.3 and 3.4 show that one HMO and two GPOs had paid
outpatient drug prices that, on average, were some of the lowest
prices paid by all the purchasers in the study. 


--------------------
\15 Change in the median percentage difference between purchase price
and best price was the result of change in both variables.