United States: Medicaid Drug Pricing: Increasing Federal and State Focus on Enforcement and Cost Containment

Summary

Recent events highlight increased activities by both federal and state enforcement agencies addressed at historical Medicaid drug pricing strategies, with a growing focus on programmatic changes which could help control future Medicaid drug costs. These activities include Congressional hearings and multiple new reports by the Health and Human Services’ Office of Inspector General ("OIG") on drug pricing excesses, as well as the state of California’s litigation based on allegations of drug pricing manipulation.

With the goal of controlling future drug costs, a new report from the National Association of [State] Attorneys General ("NAAG") discusses alternative state approaches including regulation of pharmacy benefit managers, preferred drug lists, prior authorization requirements, supplemental rebates, and marketing restrictions. Consistent with the theme of containment of drug costs, California voters have been offered competing initiatives on the November state ballot, each designed, albeit differently, to control the spiraling costs of drugs for the uninsured.

Presently, drug manufacturers are required to report their "best prices" to the Center for Medicare and Medicaid Services ("CMS") and reimburse (by rebate) state Medicaid programs based upon their reported prices. Enforcement actions brought by the federal government for alleged violations of the Medicaid drug rebate program have been lucrative, and to date include:

• The 2004 global settlement of $345.5 million paid by Schering- Plough Corporation, of which a large portion related to allegations of improper pricing pr actices for its allergy drug Claritin.

• AstraZeneca’s (and related entities) 2003 global settlement of $355 million, resulting in part from its marketing and pricing of its prostate cancer drug, Zoladex.

• Bayer’s settlement of $257.2 million in 2003 due to its failure to include sales to a national HMO in its calculations of "best price," and a related settlement by GlaxoSmithKline of almost $88 million.

Settlements, however, do not necessarily suggest culpability: in some cases, the cost of defense (including adverse publicity) may dictate a need to settle for reasons other than the merits of the allegations. Nonetheless, the financial impact of these settlements has helped focus Congressional and enforcement attention on drug pricing issues.

On August 25, 2005, California’s Attorney General filed suit against 39 drug manufacturers claiming manipulation of pricing data for drugs paid for by the state’s Medi-Cal (Medicaid) program, resulting in a potential loss to the state of hundreds of millions of dollars. This action amended a complaint originally filed in 2003 against two manufacturers, based upon a whistleblower’s allegation, and is premised upon California’s false claims act which provides for treble damages and penalties of $10,000 per claim. The state alleges that as a result of the defendants knowingly filing false claims, it was defrauded and paid higher rates, and the manufacturers created a financial incentive for doctors, and others, to utilize their products, for the purpose of capturing greater market control.

In yet another enforcement matter involving drug pricing, California’s Santa Clara County filed suit in August 2005 against a number of large pharmaceutical manufacturers for alleged violations of the so-called Section 340B program, a condition for Medicaid participation, which requires drug manufacturers to provide a statutorily defined discount on outpatient drugs to qualified entities (e.g., public [county] hospitals and community health centers). This discount allows those healthcare providers to buy pharmaceuticals at a reduced rate, and Santa Clara County alleges that it and similarly situated California counties, have overpaid for prescription drugs manufactured and sold by the defendants.

Two days of testimony before the Senate Finance Committee in June 2005 directed at Medicaid "waste, fraud and abuse" confirmed that the OIG will continue to treat Medicaid drug pricing issues as a top enforcement priority. Simultaneously, the OIG issued three audit reports on Medicaid drug prices (followed shortly thereafter by a fourth), and described later in this Law Watch, which concluded that Medicaid has historically paid far too much for drugs, and changing reimbursement for Medicaid drugs would result in a significant favorable impact on the program’s expenditures.

As Senator Charles Grassley (RIowa) explained in his introductory remarks, "the call for immediate action should be loud and clear."

At these hearings, testimony by a representative of the Government Accountability Office ("GAO") criticized CMS for its inadequate support of state Medicaid fraud enforcement issues, which likely will result in pressure from Congress, and/or the administration, to increase that support and, in turn, result in increased state enforcement actions.

James Moorman, President and CEO of the whistleblower advocacy organization "Taxpayers Against Fraud," also testified on the impact which the federal False Claims Act ("FCA") has had on recoveries of erroneously expended Medicaid funds. He noted 10 Medicaid settlements in 2004 against pharmaceutical manufacturers which resulted in paybacks of $535 million to the federal treasury and an additional $413 million to the states, with a combined total of approximately $2.5 billion when criminal fines and penalties were included. As many health care providers and suppliers have painfully learned, while the FCA provides a powerful tool for government enforcement, perhaps even more significant is the FCA’s qui tam, or whistleblower provision, which allows individuals to share in the government’s recoveries. Whistleblowers are frequently employees (or ex-employees) who are privy to the most closely held information of a corporate entity, and sometimes may themselves have contributed to the pattern or practice which ultimately is found to be fraudulent. Moorman noted recent Department of Justice figures indicating that 150 existing federal whistleblower cases involving approximately 500 drugs are still in their initial stages and remain under seal, i.e., potential defendants have not been notified of their filing. Moorman’s testimony included recommendations for several changes to the FCA and urged for greater resource allocations to encourage even more such actions.

The hearings included a panel discussion addressed solely to prescription drug pricing issues. Testifying on behalf of the OIG, Robert A. Vito observed the discrepancies in drug payments resulting from existing state methodologies, with the OIG’s recommendation that states should revise their systems to base reimbursement on pricing data that more accurately reflects actual acquisition costs. He also noted missed opportunities to apply the Medicaid federal upper payment limits to multiple source (generic) drugs. The OIG further found that poor management by some states of their Medicaid rebate programs, has resulted in additional losses relating to drugs. It was also observed that rebate amounts were generally not linked to state payments, and indeed are often based on a different methodology, such that increases in payments by the states did not result in increased rebates. Aptly demonstrating the OIG’s commitment to Medicaid drug pricing issues was an appendix, attached to his written comments, detailing 21 reports the OIG had issued to date on Medicaid drug payments.

In June 2005, the OIG released three studies concluding that Medicaid currently pays too much for prescription drugs. The first report, "Medicaid Drug Price Comparison: Average Sales Price [.ASP.] to Average Wholesale Price ["AWP"]."concludes that Medicaid reimbursement based on AWP greatly exceeds what Medicaid would otherwise pay if reimbursement were based on ASP. (Note that a pending proposal from the President would require Medicaid drug payments to be linked to ASP.)

The second report, "Medicaid Drug Price Comparisons: Average Manufacturer Price ["AMP"] to Published Prices" concludes that Medicaid reimbursement based on published prices greatly exceeds what Medicaid would otherwise pay if reimbursement were based on AMP.

The third, "Comparison of Medicaid Federal Upper Limit ["FUL"] Amounts to Average Manufacturer Prices" concludes that Medicaid reimbursement for prescription drugs on the FUL list greatly exceeds what Medicaid would otherwise pay if FUL were based on AMP.

A fourth report, entitled "Multistate Review of Medicaid Drug Rebate Programs" was released in July 2005, and details problems with various state rebate collection efforts.

As HHS Inspector General Daniel R. Levinson testified on June 28, 2005, "The ultimate goal of this work is to help ensure that Medicaid’s prescription drug programs pay a fair price that reasonably reflects actual acquisition costs." Pressure to change existing state payment methodology is likely to increase with the availability of the OIG’s data and conclusions.

Released in June 2005, the National Association of Attorneys General Presidential Report "Addressing the Cost and Benefits of Prescription Drugs" begins with the premise that the United States pays the highest price for prescription drugs of any country in the world. Medicaid now accounts for over 20 percent of many state budgets, with the drug component increasing approximately 14-15 percent between 2001 and 2004. The report includes background information about the prescription drug industry, as well as divergent opinions relating to three key drug pricing issues: research, development and innovation; marketing to physicians; and direct to consumer advertising. Also included is a summary chart and discussion of state responses to key drug pricing issues.

On the California ballot for the November 2005 election are two alternative measures designed to control drug costs for the state’s uninsured. Proposition 78 relies on voluntary discounts from drug makers and pharmacies, and has been heavily financially supported by major drug manufacturers and trade associations. Californians with incomes at or below 400 percent of the federal poverty level would be eligible to join the program at a cost of $15 per year. Under Proposition 79, companies that do not participate in a state discount program face the removal of their drug(s) from the Medi- Cal program. This proposition would also allow lawsuits against drug manufacturers who charge "unconscionable" prices or make "unjust" profits. The upcoming debate between proponents of these two warring propositions will only heighten attention on drug pricing issues.

Federal and state government focus on Medicaid drug pricing is escalating. Enforcement activity is likely to increase, as is pressure from Congress and the states, to revise the Medicaid drug payment methodology. Additional measures to control drug costs for the uninsured are also likely in the year ahead.

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