Proposing to Cut Medicaid’s Drug Payments
By Robert Pear
New York Times
Monday, December 18, 2006
WASHINGTON, Dec. 17 — The Bush administration on Monday will
propose sweeping reductions in payments to pharmacies as a
way to save money for Medicaid, the health program for more
than 50 million low-income people.
The goal is to ensure that Medicaid can get drug discounts
similar to those provided to large customers in the private
market, including companies like Caremark Rx and Medco
Health Solutions that manage drug benefits for people who
have health insurance through an employer. Congressional
investigators have found that Medicaid pays 35 percent more
than the lowest price available in the private market for
some commonly used brand-name drugs.
States, which share the cost of Medicaid with the federal
government, make the final decision on what pharmacies are
paid, subject to federal limits.
The proposed rule would provide new data for states to use
in their calculations, redefining the “average manufacturer
price” for brand-name and generic drugs.
Consumers would not be directly affected by the proposed
changes. But federal officials said they hoped consumers
would press for lower drug prices after checking the price
list, which will be posted on a Web site.
S. Lawrence Kocot, a senior adviser to the administrator at
the Centers for Medicare and Medicaid Services, said the
proposed rule would carry out provisions of a law, the
Deficit Reduction Act, signed by President Bush on Feb. 8.
The law, and the proposed rule, would also limit payments to
state Medicaid agencies for the aggregate costs of
prescription drugs when a generic substitute is available.
Federal officials said the rule would save $8.4 billion over
the next five years. That represents a 5.6 percent
reduction in total projected Medicaid spending on
prescription drugs in those years. The administration
estimates that the federal government would save $4.9
billion, and the states would save $3.5 billion, if the
proposed rule is adopted.
In a document analyzing the proposals, the Department of
Health and Human Services estimates that more than 90
percent of the savings would come from pharmacies. The rest
would come from drug companies, which would, for example, be
required to give price concessions on certain drugs
administered in doctors’ offices.
The administration said the rule could reduce revenues for
many of the nation’s 18,000 small retail pharmacies. The
administration also said it had no way to measure that
impact precisely, though it acknowledged the reductions
could fall particularly hard on “those in low-income areas
where there are high concentrations of Medicaid
Officials said that pharmacies could “mitigate the effects”
of the lost revenue by buying lower-cost drugs. This
assumes that pharmacies can find another source of supply:
generic drug companies willing to lower their prices below
the new federal limits.
The public will have 60 days to comment on the proposals.
The government will weigh the comments and then issue a
final rule with the force of law.
Bruce T. Roberts, executive vice president of the National
Community Pharmacists Association, a trade group, said, “The
proposed rule would have the perverse effect of discouraging
the use of generic drugs.”
“The new limits on Medicaid reimbursement will be way below
what drugstores typically pay for those drugs,” Mr. Roberts
Under a 1990 law, drug manufacturers must give discounts to
states that buy their drugs for poor people who receive
Medicaid benefits. The discounts take the form of rebates,
which are paid by drug companies every time their pills are
dispensed to a Medicaid beneficiary.
For a generic drug, the rebate is 11 percent of the average
price paid to the manufacturer — the average manufacturer
price. For a brand-name drug, the basic rebate is at least
15.1 percent of the average price, and it may be more
because Medicaid is supposed to have access to the “best
price” paid by any other buyer, with some exceptions.
Each drug company calculates how much it owes Medicaid for
each of its drugs.
The Goverment Accountability Office, an investigative arm of
Congress, said that manufacturers calculated prices and
rebates in very different ways because they had not received
“clear guidance” from the federal government. Moreover, it
said, federal Medicaid officials rarely check the accuracy
of these calculations.
In the proposed rule, the Bush administration takes steps to
ensure that Medicaid gets the best price available to any
buyer. In determining the best price, it says,
manufacturers must offer the government the benefit of any
“rebates, discounts or other price concessions” given to the
pharmacy benefit managers like Caremark Rx and Medco Health
Drug makers routinely pay rebates to pharmacy benefit
managers as a reward for increasing the use of their
The proposed definition of best price also includes prices
for drugs sold to mail-order pharmacies.
Purchases by mail-order houses and pharmacy benefit managers
account for a large share of all sales, and “they reflect
the realities of today’s marketplace for consumers of
prescription drugs,” the rule says.