Current Program Oversight Does Not Ensure That Manufacturer- Reported Prices or Price Determination Methods Are Consistent with Program Criteria

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. Despite these limitations, in  some instances OIG was able to identify some problems with the accuracy  of manufacturers’ reported prices; however, CMS has not followed up with  manufacturers to make sure that these problems with prices and price  determination methods have been resolved. Manufacturer Price Determination Methods Varied: Some Could Have Led to Lower Rebates

We found considerable variation in the methods that manufacturers 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 in some cases manufacturers’ assumptions could have  led to lower rebates and in other cases to higher rebates. Manufacturers  can later revise their assumptions and request recalculations of previously  paid rebates, which can result in states repaying any excess rebates. In some cases, not accounting for the effect of both price reductions—the  prompt payment discount and the chargeback—in the determination of  best price and AMP reduced rebates below what they otherwise would  have been. This approach, which diverged from the rebate agreement  and applicable CMS program memoranda, could have resulted in  artificially high AMPs, which in turn could have raised rebates. Rebate Program Does Not Clearly Address Certain Financial Concessions Negotiated by PBMs

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 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. Certain manufacturer financial concessions that are negotiated by PBMs  on behalf of their third-party payer clients, such as employer-sponsored  health plans and other health insurers, are not clearly reflected in best  price or 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. To determine the level of rebates  that manufacturers pay to states, the rebate program relies on  manufacturer-reported prices, which are based on the prices and financial  concessions available in the private pharmaceutical market. Recommendations for Executive Action

To help ensure that the Medicaid drug rebate program is achieving its  objective of controlling states’ Medicaid drug spending, we recommend  that the Administrator of CMS take the following two actions:  Issue clear guidance on manufacturer price determination methods and  the definitions of best price and AMP, and update such guidance as  additional issues arise.
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. Both reflect manufacturers' prices to various entities, accounting for certain financial concessions like discounts. Concerns have been raised about rising Medicaid drug spending. GAO studied (1) federal oversight of manufacturer-reported best prices and AMPs and the methods used to determine them, (2) how manufacturers' determinations of those prices could have affected rebates, and (3) how the rebate program reflects financial concessions in the private market.

What GAO Found

Current 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. In addition, CMS only reviews the price determination methods when manufacturers request recalculations of prior rebates. In four reports issued from 1992 to 2001, 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 drug prices reported by manufacturers, including a lack of clear guidance on how AMP should be calculated. In some cases, OIG found problems with manufacturers' price determination methods and reported prices. However, CMS has not followed up with manufacturers to make sure that the identified problems with prices and methods have been resolved. There was considerable variation in the methods that manufacturers used to determine best price and AMP, and some methods could have reduced the rebates state Medicaid programs received. 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. The assumptions often involve the treatment of discounts and other price reductions in best price and AMP. Some manufacturers combined price reductions associated with particular sales in their price determination methods, while others accounted for the reductions separately. Separate treatment of the reductions resulted in rebates to states that in some cases were lower than they would have been had the reductions been considered together. Some manufacturers made assumptions that diverged from the rebate agreement and CMS program memoranda that could have raised rebates. States could have to repay any excess rebates if manufacturers revise their assumptions and request recalculations of prior rebates. 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 that are negotiated by pharmacy benefit managers (PBM) on behalf of third-party payers such as employer-sponsored health plans and other health insurers. 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 in their determinations of best price and AMP. Within the current structure of the rebate formula, additional guidance on how to account for these 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.