	Background

The Medicaid drug rebate program provides savings to state Medicaid  programs through rebates for outpatient prescription drugs that are based  on two prices per drug that manufacturers report to CMS: best price and  AMP. Program Oversight Does Not Ensure That Manufacturer- Reported Prices or Price Determination Methods Are Consistent with Program Criteria

As we reported in February 2005, the minimal oversight by CMS and OIG  of manufacturer-reported prices and price determination methods does  not ensure that those prices or methods are consistent with program  criteria, as specified in the rebate statute, rebate agreement, and CMS  program memoranda. CMS conducts limited reviews of prices and only  reviews price determination methods when manufacturers request  recalculations of prior rebates. Although OIG in some  cases identified problems with manufacturers’ price determination  methods and reported prices, CMS had not followed up with  manufacturers to make sure that those problems were resolved. Manufacturer Price Determination Methods Varied: Some Could Have Led to Lower Rebates

As we reported, we found considerable variation in the methods that the  manufacturers we reviewed used to determine best price and AMP. Manufacturers are allowed to make reasonable assumptions when  determining best price and AMP, as long as those assumptions are  consistent with the law and the rebate agreement. We found that manufacturers made varying assumptions about which  sales and prices to include and exclude from their determinations of best  price and AMP. We also found that manufacturers also differed in how they accounted for  certain price reductions, fees, and other transactions when determining  best price and AMP. In other cases,  manufacturers’ methods could have raised rebates. Rebate Program Does Not Clearly Address Certain Financial Concessions Negotiated by PBMs

As we reported, the rebates that manufacturers pay to states are based on  a range of prices and financial concessions that manufacturers make  available to entities that purchase their drugs, but they may not reflect  certain financial concessions manufacturers offer to other entities in  today’s complex market. The rebate program did not initially address these types of  concessions, which are relatively new to the market. CMS’s subsequent  guidance to manufacturers has not clearly stated how manufacturers  should treat these concessions in their determinations of best price and  AMP. Within the current structure of the rebate formula, additional  guidance on how to account for manufacturer payments to PBMs could  affect the rebates paid to states, although whether rebates would increase  or decrease as a result, and by how much, is uncertain. As of January 2005, CMS had not issued such  clarifying guidance on how PBM-negotiated manufacturer payments  should be reflected in best price and AMP when PBMs have negotiated on  behalf of third parties.
Why GAO Did This Study

To help control Medicaid spending on drugs, states receive rebates from pharmaceutical manufacturers through the Medicaid drug rebate program. Rebates are based on two prices--best price and average manufacturer price (AMP)--reported by manufacturers. GAO was asked to discuss issues relating to the rebate program and in February 2005 issued a report, Medicaid Drug Rebate Program: Inadequate Oversight Raises Concerns about Rebates Paid to States (GAO-05-102). For that report, GAO reviewed program guidance and OIG reports and conducted an analysis of rebates for brand name drugs. This testimony is based on the February 2005 report.

What GAO Found

As noted in the February 2005 report, GAO found that rebate program oversight does not ensure that manufacturer-reported prices or price determination methods are consistent with program criteria specified in the rebate statute, rebate agreement, and Centers for Medicare & Medicaid Services (CMS) program memoranda. In administering the program, CMS conducts only limited checks for reporting errors in manufacturer-reported drug prices and only reviews price determination methods when manufacturers request recalculations of prior rebates. In several reports, the Department of Health and Human Services' (HHS) Office of Inspector General (OIG) identified several factors that limited its ability to verify the accuracy of manufacturer-reported prices, including a lack of clear guidance on how AMP should be calculated. GAO noted that although in some cases OIG found problems with manufacturers' price determination methods and prices, CMS had not followed up with manufacturers to make sure that problems had been resolved. GAO also found considerable variation in the methods that manufacturers used to determine best price and AMP. In some cases, manufacturers' assumptions could have lowered rebates; in other cases, their assumptions could have raised rebates. Manufacturers are allowed to make assumptions when determining best price and AMP, as long as they are consistent with the law and the rebate agreement. GAO found that manufacturers made varying assumptions about which sales and prices to include and exclude from their determinations of best price and AMP. Manufacturers also differed in how they accounted for certain price reductions, fees, and other transactions when determining best price and AMP. The rebates that manufacturers pay to states are based on prices and financial concessions manufacturers make available to entities that purchase their drugs but may not reflect certain financial concessions they offer to other entities. In particular, the rebate program does not clearly address certain manufacturer payments negotiated by pharmacy benefit managers (PBM) on behalf of third-party payers. These types of financial arrangements are relatively new to the market. CMS's guidance to manufacturers has not clearly stated how manufacturers should treat these payments when determining best price and AMP. Additional guidance on how to account for these payments could affect rebates, although whether rebates would increase or decrease as a result, and by how much, is uncertain.