Government is overpaying for prescription drugs, investigators say

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Instead of using optional lower prices, federal agency is reimbursing drugs at expensive market prices

Why It Matters:

Ballooning healthcare costs have come under increased scrutiny from lawmakers as the government seeks anyway to cut down on spending.  But a new report from a government watchdog says that Medicare has been paying too much for prescription medication, possibly costing taxpayers millions.

The government office that oversees Medicare and Medicaid has reimbursed prescription drugs at market costs, instead of at optional lower rates that could potentially save taxpayers millions of dollars a year, a government investigation has found.

The Centers for Medicare and Medicaid Services (CMS) reimburses prescription drug purchases by beneficiaries through Medicare Part B.  The cost is supposed to be no more than five percent above what it takes to manufacture the drugs.

If the price goes higher, the Secretary of Health and Human Services can disregard the average sales price (ASP), and instead reimburse drug costs at just three percent above manufacturing costs.

But CMS has instead often been paying the higher drug costs, the HHS inspector general found.  If health officials used the lower prices, it could have saved an estimated $553,000 in the fourth quarter of 2012 alone on the group of drugs that were reviewed, investigators said.

“In the long term, savings achieved through price substitution could reduce waste and conserve taxpayer funds at a time when increased focus has been placed on rising health care costs and fiscal responsibility,” the inspector general’s report said.

For 388 drugs with complete data on their manufacturing costs, investigators found that 19 were being reimbursed at rates higher than five percent.  In fact, three of the drugs were costing between 40 and 50 percent higher than their manufacturing price, investigators said.

The IG is required to notify HHS when market prices for drugs goes higher than five percent of the average manufacturing price (AMP).  However, the recommendations seem to be falling on deaf ears.

Since 2005, the inspector general has issued “27 reports comparing ASPs and AMPs.  However, CMS has yet to lower reimbursement in response to OIG‘s findings and recommendations,” investigators said.

In one of the inspector general’s previous reports, CMS expressed concerns that the payoff won’t be great, and that the pricing substitution policy “will generate minor savings for the program.”  The IG said every little bit helps.

“Although we acknowledge that the savings from any single OIG report may be modest relative to total expenditures for Part B drugs, significant savings would have accrued had CMS taken action immediately after OIG issued its first pricing comparison,” the inspector general said.

And officials lack information for how much it takes to make some drugs.  According to a CMS coding system, 67 drugs only had partial data on their manufacturing costs, and 50 had no data.  Officials are continuing to pay the market price on those drugs since they can’t base the price off of production costs.

“CMS has expressed concern that partial AMP data may not adequately reflect market trends and therefore will not apply its price substitution policy to drugs with partial AMP data,” the IG report said.

Looking at the 67 with partial data, investigators said at least 10 should have had their price reduced.



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