OIG and Drug Pricing

Another interesting report from the Office of Inspector General at Health and Human Services focuses on the relationship between actual costs of drugs to pharmacies and various drug pricing benchmarks.   (OIG Report)   With extensive use of drugs by the Medicaid and Medicare populations, figuring out how to ensure that the government (really the taxpayers) reimburse at the lowest possible level is a major effort.  Digging out how much drugs really cost a pharmacy and what their reimbursement from third-party payers is requires an intensive effort into an often baffling distribution and payment chain.  Historically, Average Wholesale Price was used as the basis for much pharmacy benefit reimbursement.  It supposedly represented manufacturers’ list prices to customers, but many investigations found it had no relationship to that and because of lawsuits, it has a checkered reputation and the largest publisher of the data has now stopped making it available.

Federal regulations require Medicaid programs to pay no more than the Federal Upper Limit for generics and other multi-source drugs and the lesser of estimated acquisition cost and a reasonable dispensing fee or the pharmacy’s usual and customary charge to the public for single-source drugs.  Some multi-source drugs don’t have a FUL.  The Medicaid program also requires manufacturers to report the average price of their drugs based on actual sales transactions.  The OIG report examined the relationship between pharmacy invoices, AWP, WAC and AMP.  Currently 45 states still use some version of AWP in their Medicaid drug reimbursement.  The basic finding was that for single-source drugs there was a consistent relationship of AWP, WAC and AMP to invoice prices, but there was not such a relationship for multi-source drugs without a FUL.

OIG’s work was based on a random sampling of actual invoices to retail pharmacies.  They did not try to ascertain discounts or other price adjustments not reflected in the invoices.  Although it is based on actual invoices, it turned out that AMP had the least consistent relationship to invoice prices for multiple-source drugs without FULS.  The OIG recommended that states have a separate reimbursement strategy for single-source drugs, for brand-name multi-source drugs and for  generic multi-source drugs.  Despite earlier OIG reports warning that states were likely over-reimbursing, it appears that many Medicaid programs continue to pay more than they intend to for drugs.