Medicaid Outpatient Drugs: Estimated 2007 Federal Upper Limits for Reimbursement Compared with Retail Pharmacy Acquisition Costs

Correspondence issued by the Government Accountability Office with an abstract that begins "Spending on outpatient prescription drugs in Medicaid--the joint federal-state program that finances medical services for certain low-income adults and children--has accounted for a substantial and growing share of Medicaid expenditures. Medicaid's total spending on outpatient prescription drugs grew from $4.6 billion in fiscal year 1990 to $40 billion in fiscal year 2004--or from 7.0 to 14.2 percent of Medicaid's total expenditures for medical care. State Medicaid programs do not directly purchase prescription drugs; instead, they reimburse retail pharmacies for covered outpatient prescription drugs dispensed to Medicaid beneficiaries. For some outpatient multiple-source prescription drugs, state Medicaid programs may only receive federal matching funds for reimbursements up to a maximum amount known as a federal upper limit (FUL). Required by law as a cost-containment strategy, FULs are calculated as 150 percent of the lowest price for a drug, from among the prices published nationally in three drug pricing compendia. State Medicaid programs have the authority to determine their own reimbursements to retail pharmacies6 for covered outpatient multiple-source prescription drugs, as long as those reimbursements do not exceed established FULs in the aggregate. The Deficit Reduction Act of 2005 (DRA) included provisions that changed the methodology for calculating FULs. Beginning January 1, 2007, a drug's FUL will be based on the average manufacturer price (AMP). The Congressional Budget Office estimated that when implemented, AMP-based FULs could reduce total Medicaid spending for prescription drugs by $3.6 billion from 2007 to 2010 and by about $11.8 billion from 2007 to 2015. Though representing a potential cost saving measure for Medicaid, the change in FUL calculation methodology--using AMP instead of the lowest published price--has raised concerns among retail pharmacies serving Medicaid beneficiaries. Because of interest in the potential effects of the AMP-based FULs on retail pharmacies, information was requested on how AMP-based FULs will compare with retail pharmacy acquisition costs. GAO estimated what the AMP-based FULs would have been if they had applied in 2006 and compared them with average retail pharmacy acquisition costs from 2006 for frequently used and high expenditure multiple-source outpatient prescription drugs in Medicaid.