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Medicare Reform Could Harm Medicaid, 340B Program

Donna Young

A provision in the Medicare reform bills passed by the House and Senate in June could motivate pharmaceutical manufacturers to increase product prices at an advanced rate and upset a system that was designed to ensure best product prices for programs serving the poor, according to some state associations and a member of Congress.

House and Senate negotiators are struggling to finalize legislation that would provide Medicare beneficiaries a prescription drug benefit beginning in 2006.

A measure included in the legislation would exempt Medicare and the pharmacy benefit managers (PBMs) hired to administer the prescription drug benefit from a law that requires pharmaceutical manufacturers to offer best prices or better for products to state Medicaid programs and 340B-covered entities.

The best-price provision is part of the Medicaid rebate program, which was established by Congress under the Omnibus Budget Reconciliation Act of 1990. The provision was later extended to the 340B drug-pricing program.

Under the law, manufacturers that give large discounts to private-sector purchasers must give the same discounts to Medicaid and 340B-covered entities.

According to the House Committee on Ways and Means, the exemption from the best-price provision would encourage pharmaceutical companies to negotiate low prices for Medicare beneficiaries’ medications and save the federal government millions of dollars.

The Congressional Budget Office (CBO) in 2002 estimated that, by exempting Medicare drug plans from the best-price requirement, the federal government could cut $18 billion over a decade from the estimated cost of a prescription drug benefit.

Medicaid’s best-price requirement, CBO said in a July 2002 letter to the Ways and Means Committee, “constrains price competition” and “manufacturers would be less willing to give large discounts or rebates to Medicare purchasers if the best-price provision were to apply.”

But by exempting a large share of the drug-purchasing market from the Medicaid best-price provision—about 40 million people are covered by Medicare—it would create a market gap that pharmaceutical companies would seek to fill by raising product prices for all purchasers, said Matt Salo, director of health legislation for the National Governors Association (NGA).

“Common sense tells you that the pharmaceutical industry isn’t going to suck up . . . $18 billion,” he said. “This doesn’t happen in a vacuum. If you squeeze down the balloon somewhere, it pops out elsewhere. And we are very concerned that if you squeeze down to make Medicare cheaper, it squeezes back up in Medicaid.”

Joy Johnson Wilson, director of health policy for the National Conference of State Legislatures (NCSL), said the Medicare exemption will erode and undermine the viability of the best-price provision and result in fewer savings on drug products for state programs.

Representative Henry A. Waxman (D-California), ranking minority member of the House Committee on Government Reform, proposed an amendment, which later failed, to the House’s 2002 prescription drug bill to strike the Medicare exemption.

“The congressman has a great deal of concern about the Medicare exemption and thinks Medicaid best prices will be sacrificed in order to hold down Medicare cost estimates,” a spokeswoman in his office said. CBO’s rationale that the government would save $18 billion by exempting Medicare from the best-price provision is flawed, she added, because it is unknown what prices PBMs will negotiate with drug companies on behalf of Medicare beneficiaries.

“It’s a hidden black box,” she said.

Cheryl Rivers, executive director of the National Legislative Association on Prescription Drug Prices and a former Vermont state senator, said that Medicare will never have a meaningful drug benefit as long as the government allows manufacturers and PBMs to “shroud in secrecy” the prices negotiated for products.

“How can you have a free market with secret prices,” she said. “There needs to be transparency and an end to these secret deals.”

NCSL’s Wilson agreed and said that her organization adopted a similar position in July about prices offered to Medicaid.

“Secrecy in government financial dealing is bad public policy,” an NCSL statement said. “The current federal requirement for secrecy in Medicaid prescription drug purchasing should be removed to allow states to make public the prices paid for individual drugs, the rebates received, and the net prices paid. The identity of the recipients of individual prescriptions should remain confidential. This change would facilitate public debate on Medicaid drug purchasing policies and would facilitate the operation of a competitive free market for prescription drugs.”

The Office of the Inspector General (OIG) for the Department of Health and Human Services is responsible for monitoring prices offered to Medicaid from manufacturers. But the agency has conducted few audits examining best-price issues since the rebate law was established in 1990.

Two audit reports, one from 1994 and the other from 1996, are restricted from public view because they contain “proprietary information” about drug manufacturers, according to Judy Holtz, OIG spokeswoman.

At Representative Waxman’s request, OIG in 1999 investigated allegations that drug companies were circumventing Medicaid’s requirements by excluding sales to repackagers from best-price calculations. The agency examined Medicaid rebates for 200 drugs. It released a preliminary report in February 2000 and a more extensive report in March 2001.

OIG found that seven manufacturers had excluded sales to repackagers from their best-price determinations, including sales to three health maintenance organizations (HMOs).

Medicaid’s rebate law requires manufacturers to include sales to HMOs in best-price computations.

“Drug companies sold popular brand-name drugs to HMOs at a discount without reporting the lower price as required by law,” Waxman said in an April 2001 statement about OIG’s findings. “These scams have cost the American taxpayers more than $100 million.”

In a March 2003 report, the agency found that five manufacturers of 11 prescription drugs had overcharged 340B-covered entities $6.1 million for sales occurring from October 1998 through September 1999.

The overcharges occurred, OIG stated, “because drug manufacturers inappropriately excluded sales to HMO repackagers from their best price determinations for the rebate amount calculation.”

Wilson questioned whether OIG would have the resources available to monitor Medicaid best-price issues and ensure that taxpayer dollars are being fairly spent on a Medicare drug benefit.

“The sheer magnitude of a Medicare [drug-benefit] program would give us pause,” she said.

The pharmaceutical industry and PBMs have had too much influence over the Medicare reform legislation, Rivers said, adding that she worries that industry will use its power to get language included in the final bill that could harm state drug-assistance programs, such as Maine Rx—a program that uses the state’s Medicaid buying power to negotiate prices with pharmaceutical companies and obtain rebates to fund a discount program for residents who lack prescription drug coverage.

The pharmaceutical industry had sued Maine to block the program. The Supreme Court ruled in May that the state could proceed with implementing Maine Rx.

NGA’s Salo said states are also concerned that under the Senate’s bill, about 6.2 million low-income seniors and people who are disabled that qualify for benefits from Medicare and Medicaid—known as dual eligibles—would not be covered by the Medicare prescription drug benefit.

Few members of Congress understand the dilemma that certain provisions in the Medicare reform legislation create for states, said Wilson.

“There are not many Medicaid gurus such as Mr. Waxman left in Congress who understand how the Medicaid rebate program works,” she said.

Rivers said another problem is that many members of Congress have failed to read and research the legislation’s many provisions.

When she asked one senator’s aide if the member of Congress had read certain reports and information concerning the Medicare reform legislation, the aide responded that the senator did not have time to read the reports before voting on the measure.

“How can you vote when you don’t know what you are voting for,” Rivers said.

But the major problem with the Medicare reform legislation, she added, is that Congress is not providing “enough money for a decent [prescription drug] benefit.”

“It’s the dirty little secret,” she said.