State Medicaid Programs Overpay Pharmacies for Prescription Drugs, OIG Report Finds

A failure to account for discounts that pharmacies receive from drug makers cost state Medicaid programs more than $1 billion in 1999 in excessive reimbursements, according to a report released yesterday by the HHS Office of Inspector General. The Wall Street Journal reports that state Medicaid programs "typically base their payments to pharmacies" for brand-name medications "on the average wholesale price" of a drug "minus a percentage that represents the discounts pharmacies achieve." According to the OIG report, pharmacies on average received a 22% discount on the AWP from drug makers in 1999, while state Medicaid programs on average used only a 10% discount to calculate reimbursements to pharmacies (Lueck, Wall Street Journal, 8/31). In the report, OIG investigators studied 200 brand-name drugs "with the greatest amount of Medicaid reimbursement in 1999" and found that state Medicaid programs could have saved up to $1.08 billion by basing pharmacy reimbursements on a 22% discount from AWP rather than 10% (OIG release, 8/30). In the report, Michael Mangano, principal deputy inspector general, wrote that the federal government should "require the states to bring pharmacy reimbursement more in line ... with the cost being realized by the pharmacies in their states." In a separate statement, Michael McMullan, acting deputy administrator of the Centers for Medicare and Medicaid Services (formerly HCFA), said that he would send the report to states and "encourage them to review their estimates of acquisition costs."

Wrong at the 'Core'?
However, a pharmacy group challenged the conclusions of the study and called the 22% AWP discount "incorrect." Kurt Proctor of the National Association of Chain Drug Stores said, "With our core knowledge of this business, we know it isn't accurate." According to the Journal, pharmacies have opposed reducing Medicaid reimbursements, maintaining that the program "doesn't pay them adequately for costs linked to the drugs, such as storage, dispensing and distribution" (Wall Street Journal, 8/31). The OIG report is available online. Note: You must have Adobe Acrobat Reader to view the report.