Department  of  Health  and  Human  Services 
OFFICE  OF 
INSPECTOR  GENERAL 
THE  IMPACT  OF  HIGH-PRICED 
GENERIC  DRUGS 
ON  MEDICARE  AND  MEDICAID 
JUNE GIBBS BROWN 
Inspector  General 
JULY1998 
OEI-03-97-00510  OFFICE  OF INSPECTOR  GENERAL 
The mission of the Office of Inspector  General (OIG),  as mandated by Public Law  95-452,  is to 
protect  the integrity  of the Department  of Health  and Human  Services programs  as well  as the 
health and welfare  of beneficiaries  served by them.  This statutory  mission is carried out through  a 
nationwide  program  of audits, investigations,  inspections,  sanctions, and fraud alerts.  The 
Inspector  General informs the Secretary of program  and management problems and recommends 
legislative,  regulatory,  and operational  approaches to correct  them. 
Office  of Evaluation  and Inspections 
The Office of Evaluation  and Inspections  (OEI)  is one of several components  of the Office of 
Inspector  General.  It conducts  short-term  management and program  evaluations (called 
inspections)  that focus on issues of concern to the Department,  the Congress, and the public.  The 
inspection  reports  provide  findings  and recommendations  on the efficiency,  vulnerability,  and 
effectiveness of departmental  programs. 
OEIs Philadelpia  Regional  Ofice  prepared this report  under the direction  of Robert  A. Vito, 
Regional  Inspector  General, and Linda M.  Ragone, Deputy  Regional  Inspector  General.  Principal 
OEI  staff included: 
REGION  HEADQUARTERS 
Linda  M. Ragone, Project  Leader  Lisa A. Foley, Program  Specialist 
David  Graf 
Cynthia Hansford 
To obtain copies of this report, pleasecall the Philadelphia Regional Office at l-800-53 l-9562. 
Reports are also available on the World Wide Web at our home page address: 
http://www.dhhs.gov/progorg/oei  EXECUTIVE  SUMMARY 
PURPOSE 
To determine the impact of high-priced  generic drugs on the Medicare  and Medicaid  programs. 
BACKGROUND 
Both  Medicaid  and Medicare  pay billions  of dollars each year for prescription  drugs.  The 
Medicaid  program  paid nearly $10 billion  for prescription  drugs in 1995.  Although  Medicare 
provides  reimbursement  for only certain types of drugs, the Part B program  still paid more than 
$2.3 billion  dollars for prescription  drugs in 1996. 
On January 1, 1998,  Medicare  Part B began to reimburse covered drugs at 95 percent of the 
average wholesale  price (AWP).  This change in reimbursement  was the result of legislation 
enacted by Congress.  Previously,  Medicare  carriers determined the amounts that Medicare  paid 
for prescription  drugs based on the lower  of the Estimated  Acquisition  Cost (EAC)  or the national 
(AWP).  Historically,  carriers had used 100 percent of AWP  and not estimated acquisition  cost to 
determine Medicare  reimbursement  allowances  for prescription  drugs. 
For drugs with  generic versions, Medicare  carriers determine reimbursement  based on 95 percent 
of the median AWP  for all generic versions of the drug.  Prior to January 1998, Medicare 
reimbursed  drugs with  generic versions at 100 percent of the median AWP.  Medicare 
reimbursement  amounts include both the amount that Medicare  and its beneficiaries pay a drug 
supplier. 
In general, State Medicaid  agencies use either a discounted  AWP  or estimated/wholesale 
acquisition  cost method to reimburse prescription  drugs.  State Medicaid  agencies also receive 
manufacturer  drug rebates. 
This inspection  report  resulted from a Congressional  request concerning  high-priced  generic 
drugs.  Using the drugs identified  in the request, we collected  data from three main sources.  To 
verify NDC  codes and average wholesale  prices, we reviewed  data from the July 1997Red Book 
CD-ROM  update.  We compiled  Medicare  statistics from the National  Claims History  (NCH) 
File.  We collected  drug rebate data from the Medicaid  Drug  Rebate Initiative  (MDRI)  System. 
FINDINGS 
Medicare  and its beneficiaries  could  have saved $5 million  to $12 million  for  four  drugs  if 
I99 7 reimbursement  had not been based on higher-priced  generic  versions. 
We found  several cases where average wholesale  prices for generic products  were three to four 
times greater than the brand price.  For the four  drugs reviewed,  we determined that the Medicare 
program  and its beneficiaries  could have saved $5 million  dollars if 1997 reimbursement  had been 
based on the average wholesale  price of the brand-name products.  If reimbursement  had been 
1  based on the median of generic drugs with  prices less than the brands, Medicare  and its 
beneficiaries  could have saved $12 million  for the four  drugs. 
Floridas  Medicaid  program  could  have saved half  a million  dollars for just  eight  drugs  in 
1996 if higher-priced  generic  drugs  had been reimbursed  at brand prices. 
Using the current  reimbursement  formula,  Florida  Medicaid  in some cases paid three times more 
for a generic than it did for the brand version of the eight drugs reviewed.  After  factoring  in 
manufacturer  rebates, the program  paid more than five to eight times more for generics than brand 
products.  If Florida  Medicaid  had capped reimbursement  for higher-priced  generic drugs at the 
reimbursement  level for the highest-priced  brand drug, nearly half a million  dollars would  have 
been saved for just  eight drugs in 1996. 
RECOMMENDATIONS 
There is evidence that high-priced  generic drugs have a significant  financial impact on Medicare 
and Medicaid  reimbursement.  We found that the inclusion  of higher-priced  generic drugs in 
Medicare  payment calculations  can raise allowances  above the price of brand-name  drugs.  In the 
Medicaid  program,  utilization  of higher-priced  generic drugs was widespread  among the drugs 
reviewed. 
We believe further  reductions  need to be made in Medicare  and Medicaid  reimbursement  for 
prescription  drugs.  We continue  to support  the Health  Care Financing  Administrations  legislative 
proposal  to link Medicare  reimbursement  to the acquisition  cost of prescription  drugs.  However, 
until broader  legislation  is enacted, we believe refinements to the current  system are needed. 
Since the changes recently  enacted by Congress continue to link reimbursement  to average 
wholesale  prices, we believe that mechanisms should be in place to limit the impact that high-
priced generic drugs have on reimbursement.  Medicares  new reimbursement  methodology  for 
prescription  drugs will  not prevent higher-priced  generics from increasing Medicare  allowances. 
Higher-priced  generic drugs will  still be included  in the median calculation.  When the median 
generic policy  was implemented,  generic prices were normally  less than those of the brand-name 
product.  However,  what  may have originally  been a cost-saving  mechanism has, for certain 
categories of drugs, become a losing proposition. 
We believe that the Medicare  program  should take action to prevent these situations.  We 
recommend  that  the Health  Care  Financing  Administration  1) not  include  higher-priced 
generic  drugs  in the median  calculation  to determine  Medicare  allowances,  or 2) propose 
limiting  Medicare  allowances  to brand  prices  when  higher-priced  generic  drugs  are 
involved. 
In contrast to the Medicare  program  which  pays for brand and generic drugs at the same rate, 
Medicaid  reimburses based on the specific drug supplied.  Therefore,  we recommend  that  the 
Health  Care  Financing  Administration  limit  Medicaid  reimbursement  of higher-priced 
generic  drugs  to the amount  reimbursed  (prior  to rebate)  for  lower-priced  brand  or 
appropriately-priced  generic  drugs. 
ii  AGENCY  COMMENTS 
The HCFA  concurred  with  our recommendation  for the Medicare  program.  The agency stated 
that they will  consider these options  in regulations  implementing  provisions  of the Balanced 
Budget  Act  of 1997. 
Although  not addressed in the agency comments, the HCFA  did issue a program  memorandum  in 
January 1998 to Medicare  contractors  instructing  that if the brand name product  AWP  is lower 
than the median of the generic AWP,  calculate a new median with  the brand AWP included.  We 
believe this revision  of the reimbursement  calculation  will  reduce some of the impact that high-
priced generic drugs have on Medicare  payments. 
The HCFA  did not concur with  our recommendation  for the Medicaid  program.  The agency 
agreed that high-priced  drugs can have an adverse impact on Medicaid  reimbursement  but 
believed that States are in a better position  to assure that lower-priced  brand-named  drugs are 
dispensed before higher-priced  generics.  The HCFA  believes that States already have the 
authority  to institute  programs  to ensure appropriate  payments for prescription  drugs.  However, 
HCFA  will  forward  the information  from this report  to the States and will  continue  to encourage 
them to use existing mechanisms to prevent higher-priced  generics rather than less costly brand 
drugs from being dispensed. 
We recognize  HCFAs  continued  efforts to provide  guidance to States in implementing  cost-
savings mechanisms for prescription  drugs.  However,  the current  authorities  provided  to the 
States did not prevent Medicaid  from paying more for generic versions of drugs than they did for 
the brand-name  product.  Therefore,  we continue  to believe that HCFA  should limit Medicaid 
reimbursement  for higher-priced  generic drugs. 
... 
111  TABLE  OF  CONTENTS 

PAGE 
EXECUTIVE  SUMMARY  .................  . .  ......  ......  . 
 ...........  i 
INTRODUCTION  ........................  . .  ......  ...... 
 ...........  1 
FINDINGS..  ............................  ......  ......  . 
 ...........  6 
l Medicare  savings for four  drugs  ............  ......  ...... 
 ...........  6 
l Florida  Medicaid  savings for eight drugs  ......  ......  ...... 
 ...........  7 
RECOMMENDATIONS  ..................  ......  ...... 
 ...........  9 
APPENDICES 
A:  Impact  of High-Priced  Generic Drugs  on Medicare  ......  ...... 
 .........  A-l 
B: Impact  of High-Priced  Generic Drugs  on Medicaid  ......  ...... 
 .........  B-l 
C: Health  Care Financing  Administration  Comments  .  . . . .  . . . . . . . 
 .........  C-l  INTRODUCTION 

PURPOSE 
To determine the impact of high-priced  generic drugs on the Medicare  and Medicaid  programs. 
BACKGROUND 
Both  Medicaid  and Medicare  pay billions  of dollars each year for prescription  drugs.  The 
Medicaid  program  paid nearly $10 billion  for prescription  drugs in 1995.  This $10 billion 
represented nearly  10 percent of Medicaids  total  reimbursement  budget for all services.  Although 
Medicare  provides  reimbursement  for only certain types of drugs, the Part B program  still paid 
more than $2.3 billion  dollars for prescription  drugs in 1996. 
Medicare  Drug  Reimbursement 
While Medicare  does not pay for over-the-counter  or many self-administered  drugs, it does pay 
for certain categories  of prescription  drugs used by Medicare  beneficiaries.  Under  certain 
circumstances,  Medicare  Part B covers drugs that are used with  durable medical equipment  or 
infusion  equipment.  Medicare  will  cover certain drugs used in association with  dialysis or organ 
transplantation.  Drugs  used for chemotherapy  and pain management in cancer treatments  are also 
covered.  The program  also covers certain types of vaccines such as those for flu and hepatitis B. 
On January  1, 1998,  Medicare  Part B began to reimburse covered drugs at 95 percent of the 
average wholesale  price (AWP).  This change in reimbursement  was the result of legislation 
enacted by Congress.  Previously,  Medicare  carriers determined the amounts that Medicare  paid 
for prescription  drugs based on the lower  of the Estimated  Acquisition  Cost (EAC)  or the national 
(AWP).  The AWP  is reported  in the Red Book  and other pricing  publications  and databases used 
by the pharmaceutical  industry.  The AWPs are mainly provided  to these sources by 
pharmaceutical  manufacturers.  Historically,  carriers had used 100 percent of  AWP  and not 
estimated acquisition  cost to determine Medicare  reimbursement  allowances for prescription 
drugs.  Allowances  include both the amount that Medicare  and its beneficiaries pay a drug 
supplier. 
For drugs with  generic versions, Medicare  carriers determine reimbursement  based on 95 percent 
of the median AWP  for all generic versions of the drug.  If a brand-name  product  is priced lower 
than the median calculated,  a new median including  the brand AWP  must be calculated.  Prior  to 
January 1998, Medicare  reimbursed  drugs with  generic versions at 100 percent of the median 
AWP. 
Drugs  are currently  billed to the Medicare  program  based on codes developed by the Health  Care 
Financing  Administration  (HCFA).  These codes are developed as part of the HCFA  Common 
Procedure  Coding  System (HCPCS).  The codes define the type of drug and, in most cases, a 
dosage amount.  The codes do not indicate whether  a brand or generic version of the drug was 
1 
 administered;  nor do the codes provide  information  on the manufacturer  or distributor  of the drug 
provided. 
Medicaid  Drug  Reimbursement 
Prescription  drug coverage under the Medicaid  program  is an optional  benefit.  Each State 
program  can choose whether  to provide  recipients with  prescription  drug coverage.  At the 
present time, all 50 States and the District  of Columbia  have chosen to provide  a prescription 
drug benefit. 
Each State Medicaid  agency has the authority  to develop its own reimbursement  mechanism for 
prescription  drugs subject to upper payment limits established by HCFA.  For the most part, State 
Medicaid  agencies use either a discounted  AWP  or estimated/wholesale  acquisition  cost method 
to reimburse prescription  drugs. 
Unlike  Medicare,  most drug suppliers bill Medicaid  for reimbursement  using a national  drug code 
(NDC).  These NDCs  identify  the manufacturer  or distributor  of the drug, the product  dosage 
form,  and the package size.  From the NDCs,  the drug can be identified  as a brand or generic 
version.  Each drug manufactured  or distributed  for sale in the United  States has its own unique 
NDC  code. 
State Medicaid  agencies also receive manufacturer  drug rebates according  to Federal law (Section 
1927 of the Social Security  Act).  With the enactment of the Omnibus Budget  Reconciliation  Act 
of 1990 (OBRA  90)  pharmaceutical  manufacturers  are required  to have rebate agreements with 
the Medicaid  program  for drugs dispensed to recipients.  Manufacturers  are required  to have 
these rebate agreements in order to be eligible for Medicaid  reimbursement  of their drug products. 
The quarterly  rebate for brand-name  drugs is currently  based on the greater of 15.1 percent of 
Average Manufacturer  Price (AMP)  or the difference between the AMP  and the Best Price.  The 
AMP  is the average price paid by wholesalers  for products  distributed  to the retail class or trade. 
Best Price is the lowest  price available from the manufacturer  to any purchaser (other  than those 
excluded by law).  For generic drugs, the quarterly  rebate amount is 11 percent of AMP. 
METHODOLOGY 
This inspection  report  resulted from a Congressional  request concerning  high-priced  generic 
drugs.  The request identified  a number of high-priced  generic drugs and provided  information  on 
current  reimbursement  for drugs by the Florida  Medicare  carrier and Florida  Medicaid  agency. 
Our data collection  was conducted  and the draft inspection  report  was issued in 1997 prior  to the 
change in prescription  drug reimbursement  that was implemented  in January 1998. 
Using the drugs identified  in the Congressional  request, we collected  data from three main 
sources.  To verify the NDC  codes and average wholesale  prices, we reviewed  data from the July 
1997 Red Book  CD-ROM  update.  For information  on Medicare  allowances for prescription 
2 
 drugs, we compiled  statistics from HCFAs  National  Claims History  (NCH)  File.  We collected 
drug rebate data from HCFAs  Medicaid  Drug  Rebate Initiative  (MDRI)  System. 
We verified  reimbursement  amounts with  both the Florida  Medicaid  agency and the Florida 
Medicare  carrier.  We selected Florida  because it was the State identified  in the Congressional 
request.  We verified  Medicaid  rebate amounts with  HCFA  Central Offke  staff. 
Medicare  Savings 
For the five Medicare  drugs identified  in the request, we compiled NDC  codes and average 
wholesale  prices for all brand and generic drugs that matched the HCPCS  codes description  and 
dosage.  We collected  this information  from the July 1997 Red Book update.  We determined 
whether  a drug was a brand or generic formula  based on the data provided  in the Red Book.  For 
one of the drugs identified  (Code J9 190 - Fluorouracil,  500 mg), we could not find a brand-name 
version of the drug that met the HCPCS  description.  The NDC  code provided  was identified  in 
the Red Book  as a generic drug.  Therefore  this drug was not included  in our savings calculation. 
The NDC  codes and prices for the remaining four  drug codes are detailed in Appendix  A. 
We determined  possible savings to the Medicare  program  if higher-priced  generic drugs were 
excluded from reimbursement  calculations  using two  different  methods.  For both methods, we 
calculated  prices based on the unit dose defined by the HCPCS  code.  We also used the Medicare 
allowances  calculated by the Florida  Medicare  carrier in January 1997 for both methods.  Since 
the 1997 utilization  data contained  in the NCH  file was incomplete  at the time our review,  we 
employed utilization  data from  1996 for both savings calculations. 
For the first method,  we determined the possible Medicare  savings if the brand drug price was 
utilized  for reimbursement  rather than the median of generic prices.  We calculated the difference 
between the Medicare  allowance  and the highest-priced  brand-name  drug.  Using  data extracted 
from the NCH  file, we identified  the utilization  for each drug code.  To calculate savings, we 
multiplied  the Medicare  units reimbursed by the difference between the Medicare  allowance  and 
the highest-priced  brand product.  We chose to use the high-priced  brand since it would  provide  a 
more conservative  savings estimate.  In cases where brand prices varied, using the lower-priced 
brand would  have resulted in even greater savings. 
For the second method, we determined  the potential  savings if reimbursement  was based only on 
the median of generics with  prices lower  than the highest-priced  brand product.  We compiled  all 
of the generic prices available in the Red Book  for each drug code.  We excluded generic drugs 
with  prices greater than the highest brand price.  We then determined the median statistic for the 
remaining  prices.  The difference between the current  Medicare  allowance  and the recalculated 
median allowance  was then applied to Medicare  utilization  to determine the potential  savings. 
To determine if there were other Medicare-reimbursed  drugs with  generic versions priced higher 
than the brand products,  we reviewed  average wholesale  prices for Medicare  HCPCS  codes with 
greater than $20 million  in 1996 expenditures.  There were 22 codes with  over $20 million  in 
expenditures.  Thirteen  of the 22 codes were brand or multiple  brand products.  Two  were  not-
3 
 otherwise-classified  codes where the specific drug provided  cannot be identified.  One code was 
for a drug where  a common  dosage among products  is difficult  to determine.  Another  code was 
for general IV  infusion.  Of the five remaining  codes, one was already in our review.  For the 
remaining four  codes, we did not find evidence that higher-priced  generics had over-inflated  the 
Medicare  allowance.  However,  we did find that some generics for one of the drug codes had 
prices higher than the brand products.  Due to the large number of generic products  under this 
code, these high generic prices did not greatly  skew the median statistic. 
Medicaid  Savings 
For the ten Medicaid  drug examples identified  in the request, we compiled NDC  codes and 
average wholesale  prices for all brand and generic drugs that met the described dosages.  We 
collected  this information  from the July 1997 Red Book  update.  We determined  whether  a 
specific drug was a brand or generic version based on information  provided  in the Red Book. 
We used the NDC  codes to extract information  from the MDRI  system.  This system provides 
Medicaid  utilization,  reimbursement,  and rebate information  for prescription  drugs.  To be 
consistent with  the data provided  in the request, we extracted information  on Medicaid 
prescription  drugs for the State of Florida.  For the NDCs  identified,  we collected  information  for 
all four  quarters of 1996.  We could not find any Florida  Medicaid  utilization  for one of the ten 
drugs identified.  For a second drug, we found  only brand use in one quarter  of 1996.  Therefore, 
potential  savings calculations  were performed  on only eight of the ten drugs identified. 
The reimbursement  data provided  in the MDRI  system includes both actual drug payments and 
dispensing fees.  For every prescription  billed to Medicaid,  the program  will  pay an established fee 
to the supplier for dispensing the medication.  To compare actual drug payments for brands versus 
generics, we needed to remove the dispensing fee payments from the reimbursement  figures for 
each NDC  code. 
The MDRI  system provides utilization  data in two  formats -- number of prescriptions  and number 
of drug units reimbursed.  We used both of these formats for our calculations. 
We performed  a series of calculations  to determine the unit reimbursement  for each NDC  code. 
The steps are outlined  below. 
Step 1. 	 We determined  the dollars associated with  dispensing fees by multiplying  the 
number of prescriptions  reimbursed with  Floridas  current  dispensing fee. 
Step 2. 	 The reimbursement  for dispensing fees was subtracted from the total 
reimbursement  amount for the code. 
Step 3. 	 The drug reimbursement  calculated in Step 2 was then divided by the units of drug 
reimbursed to determine the unit reimbursement  for each NDC  code. 
4 
 To evaluate the impact of Medicaid  rebates on the payments for brand and generic drugs, we 
extracted the rebate amount per unit for each NDC  code and multiplied  this by the number of 
units Florida  Medicaid  reimbursed.  This total  rebate amount was then subtracted from the total 
drug payments determined  in Step 2 above.  The resulting  reimbursement  was divided by the 
number of units reimbursed to determine the unit reimbursement  after rebate for each NDC  code. 
The unit reimbursement  amounts both before and after rebates for each NDC  code are provided  in 
Appendix  B. 
We determined  what the potential  savings to Florida  Medicaid  could have been if reimbursement 
for higher-priced  generic drugs was capped at the reimbursement  level of the highest-priced  brand 
product.  For each generic NDC  code that was reimbursed  at a higher rate per unit than the brand, 
we calculated  savings by determining  the difference between  actual reimbursement  for the generic 
drug and the amount that would  have been paid if reimbursement  had been based on the brand 
drug payment.  This difference provided  the savings estimate for each NDC  code.  We aggregated 
the savings for each code to determine an overall savings for that particular  drug. 
5 
 FINDINGS 

MEDICARE  AND  ITS  BENEFICIARIES  COULD  HAVE  SAVED  $5 MILLION  TO  $12 
MILLION  FOR  FOUR  DRUGS  IF  1997 REIMBURSEMENT  HAD  NOT  BEEN  BASED 
ON  HIGHER-PRICED  GENERIC  VERSIONS. 
All four  drug codes reviewed  had at least two  generic versions available in 1997.  As one might 
expect, some of the generic versions identified  had average wholesale  prices lower  than the brand 
price.  However,  these drug codes also had between  one and four generic versions with  published 
prices higher than brand prices.  In several cases, prices for generic products  were three to four 
times greater than the brand price.  Actual  unit prices for all codes are provided  in Appendix  A. 
We calculated that the Medicare  program  and its beneficiaries  could have saved $5 million  dollars 
if 1997 reimbursement  had been based on the brand prices of the four  drugs.  Medicare  now bases 
payment for these drugs on the median of generic wholesale  prices.  Because of the higher-priced 
generics, the Medicare  contractor  in Florida  determined  allowance  amounts for these drugs that 
were higher than the brand prices.  The savings calculation  is detailed in the table below. 
1997 Medicare  Savings Based on Brand  Price 
HCPCS  Generic  Highest  Florida  Medicare  Potential 
Code  Dr%  Brand  Medicare  Units  Savings 
Name  AWP  Allowance 
53370  Vancomycin  $8.28  $12.91  876,506  $4,058,223 
59182  Etoposide  $136.49  $141.97  202,106  $1,107,541 
51840  Kanamycin  $3.36  $6.69  1,270  $4,229 
Sulfate 
51160  Digoxin  $2.43  $2.53  2,061  $206 
TOTAL  I  %5,170,199 
We calculated that Medicare  and its beneficiaries could have saved $12 million  if reimbursement 
had been based on the median of generic drugs with  prices less than brand prices.  Allowance 
amounts for three drugs would  have decreased by more than half if the median computation  used 
to determine Medicares  allowance  was based only on lower-priced  generics.  The fourth  drugs 
Medicare  allowance  would  have decreased by 23 percent.  The table on the next page details 
these savings calculations. 
6 
 L 
1997 Medicare  Savings Based on Median  of Lower-Priced  Generics 
HCPCS  Dwz  Recalculated  Florida  Medicare  Potential 
Code  Name  Allowance  Medicare  Units  Savings 
Allowance 
53370  Vancomycin  $6.38  $12.91  876,506  $5,723,584 
59182  Etoposide  $110.00  $141.97  202,106  $6,461,329 
51840  Kanamycin  $2.25  $6.69  1,270  $5,639 
Sulfate 
51160  Digoxin  $1.04  $2.53  2,061  $3,071 
TOTAL  $12,193,623 
Higher-priced  generic  drugs  will  continue  to impact  Medicare  despite the recent  5percent 
reduction  in drug  reimbursement. 
As of January 1998, Medicare  determines drug allowances based on 95 percent of a drugs 
average wholesale  price.  For drugs with  both brand and generic versions, Medicare  will 
determine allowances by calculating  the median average wholesale  price of the generic versions 
and then reducing  it by 5 percent.  If a brand-name product  is priced lower  than the median 
calculated,  a new median including  the brand AWP must be calculated.  However,  this method of 
calculating  allowances  can still allow  higher-priced  generics to raise Medicare  allowances. 
For the drugs we reviewed,  the 5 percent decrease will  not offset the impact that high-priced 
generics have on Medicare  allowances.  Extremely  high-priced  generics can cause Medicare 
allowance  rates to be higher than brand prices.  In the case of kanamycin  sulfate (J1840),  the 
Medicare  allowance  rate was almost double the price of the brand product. 
FLORIDAS  MEDICAID  PROGRAM  COULD  HAVE  SAVED  HALF  A MILLION 
DOLLARS  FOR  JUST  EIGHT  DRUGS  IN  1996 IF  HIGHER-PRICED  GENERIC 
DRUGS  HAD  BEEN  REIMBURSED  AT  BRAND  PRICES. 
Unlike  the Medicare  program,  Medicaid  can reimburse each brand and generic version of a drug 
at a different  level.  Many  States use some form of discounted  average wholesale  price as a basis 
for reimbursement.  The Florida  Medicaid  program  based 1996 reimbursement  on the wholesaler 
acquisition  cost plus seven percent. 
Using the current  reimbursement  formula,  Florida  Medicaid  in some cases paid three times more 
for a generic than it did for the brand version of the eight drugs reviewed.  After  factoring  in 
manufacturer  rebates, the program  paid more than five to eight times more for generics than brand 
products. 
7  If Florida  Medicaid  had capped reimbursement  for higher-priced  generic drugs at the 
reimbursement  level for the highest-priced  brand drug, nearly half a million  dollars would  have 
been saved for just  eight drugs in 1996.  Floridas  drug reimbursement  accounts for about 5 
percent of the Medicaid  programs  national  reimbursement  for drugs.  If the savings developed for 
Florida  were extended to other  States, the Medicaid  program  as a whole  could have saved $10 
million  in 1996 reimbursement  for just these eight drugs.  The table below  details the Florida 
Medicaid  savings calculations  for each of the eight drugs.  Since Medicaid  costs are shared by 
both Federal and State governments,  these estimates include both Federal and State savings. 
1996Medicaid  Savings Based on Brand Reimbursement 

Generic Drug  Name  Dosage  Savings  Savings with  Rebates 

Clindamycin  Phosphate  4 ml  $3,608  $4,617 
TOTAL  $409,257  $584,917 
As shown in the table, savings increase when Medicaid  rebate amounts are factored  into drug 
payments.  Medicaid  receives rebates of 11 percent for generic drugs but  15 percent or more for 
brand drugs.  So a higher-priced  generic will  often provide  less of a rebate to the program  than a 
lower-priced  brand product.  If one considers the after-rebate  impact, the reimbursement 
differences between the brand and higher-priced  generic drugs become even more significant. 
Appendix  B provides  a comparison  of Floridas unit reimbursement  before and after rebate for 
both the brand and generic versions of the eight drugs reviewed. 
Since Medicaid  reimburses based on the specific NDC  code, higher-priced  generics only become 
an issue if they are the particular  drugs billed to the program.  For the eight drugs reviewed,  these 
higher-priced  generics represented a significant  portion  of generic billing.  Higher-priced  generics 
accounted  for 46 to  100 percent of all generics billed for the eight drugs. 
8 
 RECOMMENDATIONS 
There is evidence that high-priced  generic drugs have a significant  financial impact on Medicare 

and Medicaid  reimbursement.  We found that the inclusion  of higher-priced  generic drugs in 

Medicare  payment calculations  can raise allowances  above the price of brand-name  drugs.  In the 

Medicaid  program,  utilization  of higher-priced  generic drugs was widespread  among the drugs 

reviewed. 

As a result of recent Congressional  action, Medicare  reimbursement  for prescription  drug codes 

will  be set at 95 percent of the published  average wholesale  price beginning  in 1998.  For drugs 

with  generic versions, Medicare  will  reimburse 95 percent of the median price of all generic drugs. 

We believe further  reductions  need to be made in Medicare  and Medicaid  reimbursement  for 

prescription  drugs.  We continue  to support  the Health  Care Financing  Administrations  legislative 

proposal  to link Medicare  reimbursement  to the acquisition  cost of prescription  drugs.  However, 

until broader  legislation  is enacted, we believe refinements to the current  system are needed. 

Since the changes recently  enacted by Congress continue to link reimbursement  to average 

wholesale  prices, we believe that mechanisms should be in place to limit the impact that high-

priced generic drugs have on reimbursement.  Medicares  new reimbursement  methodology  for 

prescription  drugs will  not prevent higher-priced  generics from increasing Medicare  allowances. 

Higher-priced  generic drugs will  still be included  in the median calculation.  When the median 

generic policy  was implemented,  generic prices were normally  less than those of the brand-name 

product.  However,  what  may have originally  been a cost-saving  mechanism has, for certain 

categories  of drugs, become a losing proposition. 

We believe that the Medicare  program  should take action to prevent these situations.  We 

recommend  that  the Health  Care  Financing  Administration  1) not  include  higher-priced 

generic  drugs  in the median  calculation  to determine  Medicare  allowances,  or 2) propose 

limiting  Medicare  allowances  to brand  prices  when  higher-priced  generic  drugs  are 

involved. 

In contrast to the Medicare  program  which  pays for brand and generic drugs at the same rate, 

Medicaid  reimburses based on the specific drug supplied.  Therefore,  we recommend  that  the 

Health  Care  Financing  Administration  limit  Medicaid  reimbursement  of higher-priced 

generic  drugs  to the amount  reimbursed  (prior  to rebate)  for  lower-priced  brand  or 

appropriately-priced  generic  drugs. 

AGENCY  COMMENTS 

The HCFA  concurred  with  our recommendation  for the Medicare  program.  The agency stated 

that they will  consider these options  in regulations  implementing  provisions  of the Balanced 

Budget  Act  of 1997. 

Although  not addressed in the agency comments, the HCFA  did issue a program  memorandum  in 

January 1998 to Medicare  contractors  instructing  that if the brand name product  AWP is lower 

9 
 than the median of the generic AWP,  calculate a new median with  the brand AWP included.  We 
believe this revision  of the reimbursement  calculation  will  reduce some of the impact that high-
priced generic drugs have on Medicare  payments. 
The HCFA  did not concur with  our recommendation  for the Medicaid  program.  The agency 
agreed that high-priced  drugs can have an adverse impact on Medicaid  reimbursement  but 
believed that States are in a better position  to assure that lower-priced  brand-named  drugs are 
dispensed before higher-priced  generics.  The HCFA  believes that States already have the 
authority  to institute  programs  to ensure appropriate  payments for prescription  drugs.  However, 
HCFA  will  forward  the information  from this report  to the States and will  continue  to encourage 
them to use existing mechanisms to prevent higher-priced  generics rather than less costly brand 
drugs from being dispensed. 
We recognize  HCFAs  continued  efforts to provide  guidance to States in implementing  cost-
savings mechanisms for prescription  drugs.  However,  the current  authorities  provided  to the 
States did not prevent Medicaid  from paying more for generic versions of drugs than they did for 
the brand-name  product.  Therefore,  we continue  to believe that HCFA  should limit Medicaid 
reimbursement  for higher-priced  generic drugs. 
10 
 APPENDIX  A 
Impact of High-Priced  Generic Drugs on Medicare 
Code J3370:  Injection,  Vancomycin  HCL,  up to 500 mg 
Florida  Medicare  Allowable  as of l/1/9  7 - $12.91 
BRAND 
Dms  NIX  Red Book 
Name  Code  AWP 
Vancocin  00002-7297-O 1  $8.28 
Vancocin  00002-7297- 10  $8.28 
Vancocin  00002-1444-01  $7.80 
Vancocin  00002- 1444-25  $7.80 
GENERIC 
I  I 
Lycophin  1  00469-2210-30  1  $10.97 
I  I 
Vancoled  00205-3 154-88  $5.76 
Vancomycin  00074-6534-01  $12.48 
II Vancomvcin  1  00074-4332-01  1  $34.66  11 
/I
Vancomvcin  003 64-2472-3 3  I 
Code J1840:  Injection,  Kanamycin  Sulfate,  up to 500 mg 
Florida  Medicare  Allowable  as of l/1/97  - $6.69 
BRAND 
Dws  NDC  Red Book 
Name  Code  AWP 
1~
Kantrex  00015-3502-20  I 
GENERIC 
Kanamycin  00686-0064-02 
Sulfate 
Kanamycin  39769-0064-02 
Sulfate 
A-l  Code JI 160:  Injection,  Digoxin,  up to 0.5 mg 
Florida  Medicare  Allowable  as of l/l/9  7 - $2.53 
Code J9182:  Etoposide,  100 mg 
Florida  Medicare  Allowable  as of 1/l/9  7 - $141.97 
BRAND 
Dw3  NDC  Red Book 
Name  Code  AWP 
Vepesid  00015-3095-20  $136.49 
Vepesid  VHA  00015-3095-30  $136.49 
Plus 
GENERIC 
/I I 
Etoposide  00186-1571-31  I  $38.75  11 
A-2 
 APPENDIX  B 

Impact of High-Priced  Generic Drugs on Medicaid 

r  Vancomycin,  500 mg  -1 
BRAND 
NDC  units  Reimbursement  Reimbursement 
Code  Reimbursed  per Unit  with  Rebate 
00002-1444-01  1,953  $6.68  $2.70 
00002- 1444-25 
 0  N/A  N/A 
00002-7297-O 1 
 0  N/A  N/A 
00002-7297- 10 
 450  $7.12  $3.04 
GENERIC 
00469-22 1O-30 
 220  $7.49  $7.12 
00205-3 154-88 
 918  $4.62  $3.46 
00074-4332-o  1 
 2,400  $26.40  $26.07 
00074-6534-o  1 
 551  $10.20  1  $9.81  /I 
00364-2472-33 
 422  $6.36  $6.33 
B-l  Vancomycin,  2 gm 
Reimbursement  Reimbursement 
00074-653  5-O 1  747  $19.81  $19.05 
00205-3  154-15  2,147  $9.27  $8.11 
00364-2473-9  1  1,290  $12.40  $12.38 
00469-2840-40  1,293  $13.91  $13.19 
Pentamidine,  300 mg 
BRAND 
NDC  Code  Units  Reimbursement  Reimbursement 
Reimbursed  per Unit  with  Rebate 
t 
00469-0113-10  232  $84.24  $61.68 
54868-2568-00  0  N/A  N/A 
57317-0210-06  1.486  $84.03  $62.88 
GENERIC 
00074-4548-o  1  757  $101.90  $96.60 
00053-1000-05  0  N/A  N/A 
00209-8560-20  0  N/A  N/A 
11098-05 12-99  0  N/A  N/A 
B-2 
 Vincristine  Sulfate,  f  ml 
BRAND 
NDC  Code  Units  Reimbursement  Reimbursement 
Reimbursed  per Unit  with  Rebate 
00002-7  194-O 1  208  $29.63  $6.38 
00013-7456-86  113  $30.93  $29.96 
00002-7198-01  0  N/A  N/A 
00002-7  198-09  0  N/A  N/A 
GENERIC 
54868-3  196-00  0  N/A  N/A 
61703-0309-06  51  $31.59  $31.11 
Etoposide,  5 ml 
BRAND 
NDC  Code  U&S  Reimbursement  Reimbursement 
Reimbursed  per Unit  with  Rebate 
00015-3095-20  1,167  $23.36  $7.09  ~ 
00015-3095-30  0  N/A  N/A 
GENERIC 
53905-0291-01  0  N/A  N/A 
00013-7336-91  1,320  $23.37  $22.09 
00186-1571-3  1  0  N/A  N/A 
00364-3028-53  0  N/A  N/A 
00703-5643-01  793  $22.50  $22.05 
00703-5653-01  0  N/A  N/A 
55390-0291-01  0  N/A  N/A 
58406-0711-12  0  N/A  N/A 
B-3 
 BRAND 
NDC  Code  Units  Reimbursement  Reimbursement 
Reimbursed  per Unit  with  Rebate 
II
000 15-3020-20  I 
GENERIC 
00074-1956-01  47  $45.94  $45.18 
00074-1958-01  90  $51.60  $50.76 
00641-0123-23  4,102  $27.27  $24.53 
00703-9032-03  2,474  $27.82  $27.60 
00024-0016-l  1  0  N/A  N/A 
00186-1703-13  0  N/A  N/A 
39769-023  7-02  7  $30.82  $30.81 
553 90-0226-02  189  $18.71  $18.28 
61703-0201-07  298  $15.78  $15.33 
6 1703-0202-07  176  $24.20  $23.66 
B-4  Clindamycin  Phosphate,  4 ml 
BRAND 
NDC  Code  units  Reimbursement  Reimbursement 
Reimbursed  per Unit  with  Rebate 
00009-0775-26  336  $2.93  $2.47 
B-5  APPENDIX  C 

Health  Care Financing Administration  Comments 

C-l  DEPARTMENT  OF HEALTH  & HUMAN  SERVICES  Health Care Financing  Administration 
The Administrator 
Washington,  D.C.  20201
DATE: 
MAY  8 1998 
TO: 	 JuneGibbsBrown 
Inspector--l 
FROM? 	 Nancy-AnnMin DeParfc 
Administrator 
SUBJECT: 	 O&e  of kpector  General(OIG) D&I  ReparkThe impactof High 
PricedGeneri~~Drugosn MedicareandMedicai& (OEI43-97-00510) 
We reviewedtheabove-refkrenceddraftreporton theimpactof high-pricedgem&cdrugs 
on MedicareandMedicaid 
Both MedicaidandMedicarepay billions of dollarseachyearfof prescriptiondrugs. The 
Medicaidprogmmpaidnearly$10billion for prescziptiondrugsin 1995.Although 
Medicareprovidesreimbmsemenftor only certaintypesof drugs,thePartB programstill 
paidmorethan$2.3billion dollarsfor prescriptiondrugsin 1996. 
Prior to January1,1998,Medicarecarriersdeterminedthe amountsthatMedicarewould 
pay for prescriptiondrugsbasedon eitherthelower of the EstimatedAcquisitionCost 
@AC) or thenationalAverageWholesalePrice(AWP). Historically, theyusedAWP to 
detemineMedicarereimbursementFor drugswith genexicversions,thecarriers 
determinedreimbursemenbtasedon themedianof all AWPsfor thegenericdrugs. Due 
to legislationrecentlyenactedby CongressM, edicarePartB wiiI beginto reimburse 
covereddrugsat 95 percentof the averagewholesalepriceon January1,1998. 
Thiskupectionreportresultedfrom a Congressionarlequestconcerninghigh-priced 
gene& dIugs. our detailedcDmmentasreasfollows: 
OIG  Recommendation 1 

TheHedfh CareFinanciq Admit&&on  shouldnot inch&  higher-pricedgenericdrugs 

in~rnediancalculationtodefcrmineM~~allowancgorproposelimitedMedicare 

auowancesto brandpriceswhenbigher-pricedgenericdrugsareinvolved~ 

We concurwith the draft  recommendationfsor Medicare,andwill considerthis 
reports 
proposalin regulationsimpkmentingprovisionsof theBalancedBudgetAct of 1997. 
c-2  OIG Recommendation 2 

TheHealthCareFinancingAdministrationshouldlimit Medicaidreimbursemenot
f 
higher-pricedgenericthugsto the amountreimbursed(prior to rebate)for lower-priced 
brandor appqr&@-priced  gene& drugs. 
ECFA Response 

We &-not concur. We areawarethathigh-priceddrugshavea sigaificantfinancial 

impacton Medicaidreimbursemenbt
utbelieveStatesarein a betterpositionto assure 
. thatlow& pricedbrand-namedrugsa& d@xnsedbeforehigherpricedgentics.  States 
cumadyhavtarrtharitytoinstit~prognmrstanquirttheuseoflowcrpricadbrandor 
appm~pricedgeneriq~dmgs.  Inadditi~alreadyeJtistiogrcgolatoryauthoaity 
~~rtqrrircsS~tolookatthtestimatedacqaisitionco~of~drugstoassure 
reimburscmcntlenlsrcntctthc~costtothepharmacyforpurchasingthestdrugs 
ratherthanwhatmaybeanover&&edpublishcdpricc. 
HCFA  conhues  to encourage ad  provide guidatrcc to states to assistin Cost-savjngs
.
me&mums  Infiathcrancc0fthattffort,wcwillforwardinformation~the~ 
OIGrepolttb~estetesina~ase,snchasastateMdicaidDirectorsletta,and 
encouragestattstouseerdstingmcchanisns~availabletodocmtoprevent~~
pricedgeneticsfirm  beingti@msed overlesscostlybrandnamedrugs. Webelievethis 
addressetsheproblemwith a minimalamountof Federalinterventioninto existingState 
opemtionsiIlthisarea 
FurthermoreH, CFA is undertak& a morecomprehensivreeviewof drugpricesandhow 
theyaflkct theMedicaid andwill issue*  guidanceto thestateson this as 
program 
apprOpriate. 
c-3