.. 
) . ,.  --'
It 
RURAL GEORGIA PHARMACY

CLOSURES

i.\lVICES' 
(I.r 
'0 
tt""!la 
OFFICE OF INSPECTOR GENERAL 
OFFICE OF ANALYSIS AND INSPECTIONS 
DECEMBER 1989  OFFICE OF INSPECTOR GENERAL

The mission of the Offce of 
Inspetor Genera (OIG) is to promote the effciency, effective
ness, and integrty of progrs in the Unite States Deparent of Health and Huma Ser
vices (HS). It does ths by developing method to detet and prevent fraud, waste, and
abuse. Create by statute in 1976, the  Secta 
Inspetor General keeps both the 
gress fully and curently inorm about progrs or management problems and reacnodm thme nCdosn
corrtive action. The OIG perform its 
mission by conductig audits, investigations, and in
spetions with approxiately 1 40 sta strtegicaly locate 
around the countr. 
OFFICE OF ANALYSIS AND INSPECTIONS 
This report is produced by the Ofce of 
Analysis and Inspetions (OAI, one of the thee

major offces within the OIG. The other two 
ar the Ofce of Audit and the Offce of Inves

tigations. Inspections ar conducte in accordace with professional stada 
develope by

OAI. These inspections 
ar tyically short-term studies designed to 
determe program effec

tiveness, effciency, and vulnerabilty to 
frud and abuse.

The purose of this inspection Rur 
, entitled " Georgia Pharacy Closurs,
" was to descrbe

the extent and causes of rual pharcy 
closurs in Georgia.

This inspetion was performed under the dition of Linda Herzg, the 
Regional Inspetor 
General of Region  Offce of Analysis and Inspetions. Parcipatig in 
the project were: 
Atlanta Region 
Headquarters
Ron Kal Project Leader  Carlyn Ris
Betty Davis 
Ruth Reiser 
Joe Townsel 
Jim Wilson 
Peggy Danel 
Jean Dufresne  GEORGIA PHARMACY

RURAL 
CLOSURES

Richard P. Kusrow 
INSPECTOR GENERAL 
OAI-049Q-00990  DECEMBER 1989  EXECUTIVE SUMMARY 
PURPOSE 
ru 
The purose of ths inspection was to examne the extent and causes of  pharacy
closures in Georgia in Fiscal Year 1989. 
BACKGROUND 
ru 
The Georgia Pharaceutical Association has expressed concern about  pharacies 
closing, and has suggeste that the closurs may be associated with Medicaid reimbursement. 
FINDINGS 
This inspection found that: 
Twelve rual pharacies in Georgia closed in Fiscal Year 1989. 
Retiement and financial problems were the reasons for closur. 
State and local respondents reported no closures were due to Medcaid 
reimburement. However, some respondents cautioned that as cost containment 
measurs are implemented in the Medcaid progrm, small pharacies with 
. high percentage of Medicaid prescription sales may experience financial 
difficulties. 
The closure of these 12 rual pharacies did not affect access to pharacy 
servces for Medcaid clients in those communities.  . ..  ..  ..  ..  ...   ...   ...   ...   ...   ....    ....    ....    ....    ....    ....    ....    ....    ....    ....    ....    ........    
. ..  ..  ..  ..  ...   ...   ....    .....     .....     ......      ......      ......      ......      ......      ......      ......      ......      ......      ......      ......      ......      ......      ......      ......      ......      ......      ......      ......      ......      ......      ......      ......      ......      ......      .....     ....    ....    ....    ....    ...   ...   ....    ....    ....    ...   ...   ...   ...  ..   ...   ...   ...   ..  ..  ..  . .. 
TABLE OF CONTENTS 
EXECUTIVE SUMMARY 
INTRODUCTION 
Purpose. . . . 
Background. . . . . . 
Scope 
FINDINGS 
Twelve Rural Pharmacies Closed in Fiscal Year 1989 . . . . . . . . . . . . . . . . . . . .. 
Retirement and Financial Problems Were the Reasons for 
Closure 
Closures Did Not Disrupt Access to Pharmacy Services for

Medicaid Clients

Medicaid Cost Containment Measures Reduce Pharmacy Profits. . . . . . . . . . 
.. 6 
Summary. . . . .  . . .. 7 
APPENDICES 
Appendix A: Information Sources and Methods. . . . . . . . . . . . . . . . . . . . . . . A 
- 1 
Appendix B: Reimbursement by State  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . B-
Appendix C: Georgia Continues to Pursue Cost 
Containment for Medicaid Pharmacy Service 
C - 1  INTRODUCTION

PURPOSE 
The purose of this inspection was to examne the extent and causes of rural pharacy 
closures in Georgia during Fiscal Year 1989. Special attention was given to the possible effect 
of Medicaid reimbursement on pharacy closure. 
BACKGROUND 
The Georgia Pharaceutical Association has expressed concern about rura pharacies 
closing, and has suggested that these closures may be associated with Medicaid 
reimbursement Because some rura communities in Georgia have high proportions of 
Medicaid recipients, and access to pharacy services may be afected by pharacy closures, 
the Deparent of Health and Human Services has an interest in this expressed concern. 
The Secretar of the Deparent of Health and Human Services (HS) requested this 
inspection. 
Medicaid Reimbursement 
progr 
Medicaid is a Federaly aided, State-administered  which provides health care for the 
progrs 
poor. States design, establish, and operate their Medicaid  under the provisions of 
XI 
title  of the Social Securty Act and HHS regulations. Usually, States make payments 
including pharacies, for services rendered to Medicaid 
diectly to health care providers, 
recipients. Within broad Federal limits, States generally are allowed to set reimbursement 
rates for health servces covered by the program. 
Federa Medicaid regulations limit reimburement for pharacy services to the lowest of: 
an upper limt established by HHS' Health Car Financing Administration 
(HCFA) for certain multi-source (generic) drgs, plus a reasonable dispensing 
fee set by each State; 
the estimated acquisition cost (EAC)--the price generally paid by 
pharacies--for any drg, as established by the State Medicaid agency, plus a 
reasonable dispensing fee;' 
the pharacy s usual and customar charge for the drg.  , . " (

Dispensing fees ar payments made to pharacies to cover the cost of fillng prescriptions. 
Federa regulations allow States to set their own dispensing fees and require only that the fees 
be "reasonable. 
States also establish the EAC. According to the Federal requirements, the amount established 
should be "the price generally and currently paid" by pharacies for the paricular drug. The 
EAC usualy applies to brand name drgs, but can be used for generic drgs if the EAC is 
lower than both the upper limit set for the generic drg and the pharacy s usual and 
customar charge. The methodology for determning the EAC vares from State to State. 
Each State s formula for EAC is shown in appendix B. 
Determination of Estimated Acquisition Costs (EAC). 
drg 
Most pharacies purhase drgs from a wholesaler who represents all the major 
manufactuers. Severa industr publications report an "average wholesale price  WP) that 
wholesalers charge for each drg. However, wholesalers offer the pharacies substantial 
discounts below the AWP as incentives for such things as high volume purchasing, timely 
payments, and infrquent deliveries. Virually all pharacies get discounts, although the 
amount of the discount may var. 
States use the A WP as a guide in establishing EACs; however, the A WP does not accurately 
reflect the price generaly paid by pharacies because it does not account for the discounts. 
Therefore, HCFA has aggressively encouraged States to establish EACs at an amount lower 
than AWP. In August 1989, HCFA revised the State Medicaid Manual to explain that, absent 
contr, 
valid documentation to the  States could no longer reimburse pharacies using A WP 
without a reduction. Nationally, HCFA expects major savings from this policy change. 
The HCFA's actions are supported by the findings of several studies. A 1984 Audit report 
llS  l concluded that, on average, 
issued by the  Inspector General pharacies actually 
2 of that audit, the 
purchase drgs for 15.9 percent below AWP. In an October 1989 update
Inspector Genera found no significant change in the level of discounting. The 1989 analysis 
showed that, on average, pharcies now purchase drgs at 15.5 percent below AWP. Recent 
studies by the HCFA Region IV and VI offices provide additional support. Their studies have 
also found that the actual price paid by pharacies is stil significantly below A WP. 
0ffce of Inspetor Genera, United States Deparent of Health and Human Services. "Changes to the 
Medicad Prscption Drg Program Could Save Milions." ACN: 06-4216. 1984. 
0ffce of Inspetor Genera, United States Deparent of Health and Human Services. "Use of Average 
Wholesae Prces in Reimburing Phanacies Parcipating in the Medicaid and the Medicare Prescription Drug 
Progr. 0689-O37. 
" CIN: A- October 1989.  SCOPE 
ru 
All Georgia  pharacies known  have close from October 1, 1988 to September 30, 
1989 and all rual pharacies that withdrw from the Medcaid progr durng that period 
were included in the inspection. Independent pharacies, community pharacies, and chain 
pharcies were included in the study. 
For puroses of this study the following definitions were used: 
One that stopped Qispensing prescription drgs durg Fiscal Year 
Closed Pharmacy: 

1989. A pharacy that was sold and remained open was not counted as a closure. Also, 
ru 
a pharacy that moved to another location in the same  community was not counted 
as a closure. 
A city, town, or locality which is not located in a Metropolitan Statistical Area 
Rural: 
(MSA) as defined by HCFA. 
Appendi A contans information on data soures and methods used in this inspection.  FINDINGS 
Twelve Rural Georgia Pharmacies Closed in Fiscal Year 1989. 
There are curently 1 976 licensed pharcies in Georgia. Approximately 46 percent are in 
rual areas. This inspectionr fuou nd only 12 closures between October 1 , 1988 and 
September 30, 1989 in the  aras of the State. 
Of the 12 stores that did close, nine were independent pharacies and three were chain drg 
stores. The map on the following page shows the location of the closed pharacies. The 
population of the towns where pharacies close rages frm 3,
112 to 37,596, with the 
exception of one town of only 757 people. All of the closed pharacies were Medicaid 
providers. 
Retirement and Financial Problems 
Were the Reasons for Closure. 
In five cases, retiement was the reason for closur. Thee owners did not have a buyer, so 
they closed their stores. Two owners sold their businesses to nearby pharacies who chose 
close these locations. None of the former owners said financial diculties had contrbuted to 
their decisions to retie.

remaiing seven cases, varous fiancial problems were cited as the reasons for closure. 
In the 
Two of the closurs were Revco stores. These were closed by Revco D.S. Inc. as par of 
reuir 
Chapter 11 banptcy proeegs, which  closing the chain s less profitable stores. 
Two other pharacies closed due to competition from bigger pharacies in town. In two 
other cases, the owners had more than one pharacy in town and decided to consolidate them. 
Finaly, one owner wanted to move out of State. His store was having cash flow problems, 
prompting his decision to close it and move. 
None of the respondents cited Medcaid reimburtshem ent as the reason for closur. However, in 
response to specific questions about Medcaid,  former owners indicated they were 
experiencing cash flow problems, and that Medcaid reimbursement was a contrbuting factor. 
Closures Did Not Disrupt Access to Pharacy Servces/or Mediaid Clients. 
The closure of the 12 pharacies did not afect access to pharacy services for Medicaid 
ru 
clients in those communities. In 11 of the  towns where pharcies closed, from 2 to 25 
other drg stores stil accept Medcaid. 
In one case, a town with a population of 757, the close pharacy was the only pharacy. Its 
closure means that al residents, includig Medcaid clients, have to go elsewhere to get 
prescrptions filled. The nearst town is nine mies away. It has 12 pharcies.  TWELVE RURAL PHARMACIES CLOSED

. RURAL PHARMACY CLOSURES  Medicaid Cost Containment Measures Reduce Pharacy Profits. 
The HCFA has been encourgig States to mofy their pharacy payment formulas so that 
reimbursement on the basis of EAC is below the A WP. 
Most States have implemented this new HCFA policy. In August 1988, Georgia  Deparent 
the 
of Medical Assistance (DMA) changed its pharacy reimburement formula. After 
months' experience with the new formula, the State 
projecte an annual savings of $7 milion. 
The DMA has not complete its fmal analysis of the actual savings. 
Georgia now: 
limits the pharacies' EAC to A WP minus 10 percent; and 
pays a dispensing fee of $4.26 per prescrption. 
As shown in appendix B, Georgia s A WP discount is comparable to those of other States. Its 
dispensing fee, at $4.26, is one of the highest. 
contaent 
What has been the effect of Georgia s cost  measures on Medcaid-parcipating
pharcies? 
State offcials say that changes in reimbursement schedules have reduced 
pharcy 
Medpcrofaits.i Hodwev er,p theay kynowm ofe non phatna ciesr wehichf clooserd inm 19s89 d.ue  to 

Most State respondents agree with the OIG Audit fmding that pharcy reimburement 
should be based on a discount from the A WP. Some point out, however, that a uniform 
pharcies 
discount wil afect individual  quite dierently. In parcular, pharacies which 
are smal and have high proportons of Medcaid-reimburable sales 
wil be more negatively 
affected than larger phanacies with low Medcaid proportons. In fact, Medicaid reductions 
may result in financial diculties for some sma pharacies. 
The respondents explain that; 
Wholesalers give discounts for volume 
purhasing, quick payment, and 
infrequent account servcing. Sma stores with low sales volumes and shalow 
inventories are unable to get the best wholesalers' discounts. Since the smaller 
stores get fewer discounts, their operating margins tend to be smaller. 
Pharacies with a high Medicaid-to-private sales ratio have limited opportunity 
to "cost shift" Medicaid reductions to other private sales. The impact on 
operating margins is compounde, then, for pharacies which serve high 
proportons of Medcaid clients.  Some respondents suggest that viable pharcies may drop out of the Medicaid program 
because of low Medicaid reimbursement. However, the number of Georgia pharacies 
parcipatig in Medicaid remais very high--over 90 percent This inspection of rura 
pharcies found that, aside from those which closed, only one pharacy withdrw from the 
progr 
Medicaid  in 1989. 
WP, the State of Georgia has recently taen steps to further 
In addition to discounts from the A 
contain Medicaid pharacy cost. These initiatives are described in appendix C. 
Summary 
ru 
This inspection found that very few  pharacies in Georgia closed in the past year and 
none of the closurs were attrbuted to Medicaid reimbursement policies. Some respondents 
cautioned that as more Medicaid cost containment measurs are implemented in Georgia, 
pharcies 
, small  with a high percentage of Medicaid sales may encounter financial problems.  APPENDIX A 
INFORMATION SOURCES AND METHODS 
Types of Information and Sources 
Lists of Pharcies Closed and Withdrwn from Medicaid Progr 
Georgia Deparent of Medcal Assistance (State Medicaid agency)

Georgia Boar of Pharacy (State licensing agency)

Georgia Pharaceutical Association

Reasons for Closur 
State Agencies/Organzations

Georgia Deparent of Medical Assistance

Georgia Board of Pharacy

Georgia Pharaceutical Association 
Georgia Legislatu 
Loal Communities where Pharacies Closed

Health care providers 
Former owner(s) of close pharacy 
Owner(s) of nearby pharacies 
Municipal officials 
Chambers of Commerce 
Impact on Access 
Ditor

Georgia Business 
Intervews with local community respondents

(See above #2.

Methods of Information Collection 
From Existing Data Bass 
The Georgia Depament of Medcal Assistace (DMA) provided a list of 
pharcies. that have ceased to parcipate in the Medicaid program. These 
pharcies either: a) had mail retued to DMA, b) had not submitted a  Medicaid claim within 2 years and had failed to respond to letters of inquir, 
or c) had voluntary withdrwn frm the program 
Pharcy 
The Georgia Board of  provided a list of pharacies which its 
licensing inspectors. had found to be closed when they went out to conduct 
inspections. 
From these two lists, all pharcies which fit the following criteria were 
identied: 
ru 
pharacies locate in 
aras; and 
pharacies whose effective date of termation frm the Medcaid 
progr 
including pharacies
was between  10/1188  and  9/30/89, 
that the licensing inspectors discovere to be closed durng that period. 
A single unduplicate list was produced of 68 rual pharacies in Georgia which 
the State believed to have closed or withdrwn from the Medcaid program
durg Fiscal Year 1989. (It should be note that adtional pharcies may have 
closed durng that time period, but have not yet appear on any State list. 
From Contacts with Informed Persons 
The inspection team attempted to contat each of the 68 pharcies by telephone 
to fIrst verify if it had closed and, if so, when. In adtion, the telephone 
interviews were to fid out: 
a. 
the reasons for the closur; 
pharacy served Medcaid clients; and 
c..  if the 
pharcies 
the location of other nearby  that fIll Medcaid prescriptions. 
Telephone intervews were conducte with the curnt or formr owner of the 
pharcy 
whenever possible. Other local respondents were also intervewed, 
includig nearby pharacy owners, other health professionals in the community, 
municipal offcials and any other knowledgeable respondents.  APPENDIX B

REIMBURSEMENT BY STATE 
iillili:i::::ii::::::ii:jj:::::i:::ijjji:iiiii::jjjjji:::::::i::jjiii:jjj: jjjji:iiji:::iii:ijjjjj:i:i:i:!ijjji:i:j:jj::::::i:::i:iij::ji::::ij:::ii::i::i:i:j::ji:ii:ji::::::::IIIIIIII:jlll::j:jjjjjii::i::i::::::::::ij::::::::::::::::::j::::::jj:j:i:i::::ji:::::::jjj:j:ji:lll:j:::::::::::::j::i:::i:::i::::I:ji:i
ALABAMA  $3.  WAC plus 9. 
ALASKA  $3.45- A WP mius 5% 
11.46 
ARIONA  State contrcts with pre-paid plans 
ARKSAS  $4.  AWPmius 7%

CALIFORN  $4.  AWPmius 5%

COLORAO  $3.  Lower of A WP or 
WAC plus 18% 
CONNCfCU  $3.  AWPmius 8%

DELAWARE  $3.  Actual Cost 
to Pharacy 
DISTRCf OF COLUMIA  $4.  A WP mius 10% 
$5. 10 for 
compound Rx 
FLORIDA  $4.  WAC plus 7% 
GEORGIA  $4.  A WP mius 10% 
HAWAII  $4.  AWP mius 10. 
IDAHO  $4.  Actual Cost 
$4. 15 unit  to Pharacy 
dose 
ILINOIS  $3.58 or  Lower of

drg 
10% of  State maximum or 
(to maximum)  Usual & Customar  i:llli
:::::iim&lIi::iii:iiii::iii:i:i:i:i:i:::::i:I::i:::i:i::::::::ii:ii:::i:ii:iiiiiiiiiiiiiiiiiii!r!iii:i:ii:::iiili:::ii::iiiiiii:i:i:I:::i:::iii:iiliii::ii:I::i::ii):ii::i:ii::::i:iIII1811: ii:i:::iii::iii::::::::::i:ii::::i:::::::i:::i:::i:i:i:::::i:i:::::i:i:i::::::::::::III::::::::::::::i:::i::::ii:i:::::::i: 
INIANA  $3.  A WP mius 10% 
IOWA  $3.  AWP 
KANSAS  $2.79 A WP mius 10% 
$5. 
Vares by 
pharacy

KENTCKY  $3.
 AWPmius 5%

LOUISIAA  $3.
 AWPmius 10. 
MAIN  $3.
 AWPmius 5%

MAYLAN  $3.
 AWP

MASSACHSETTS  $3.
 WAC plus 10%

MIcmGAN  $3.  A WP mius 10% 
MISOTA 
$4.  A WP mius 10% 
MISSISSIPPI  $3.  Lower of

State maximum or 
Usual & Customar 
MISSOURI  $3.10/  AWP 
$3. 
MONTANA  $2.  AWPmius 10%

$4. 
75 for unit 
dose systems 
NEBRASKA  $2.84 Lower of 
$5.  AWPmius 8.71% 
or WAC plus 12% 
NEVADA  $3.  A WP mius 10%  ::::::II&II:::I:::::::I:::::::::!!!:!:!:!:I:::!:!!::I::!:::!!!::II:!:::!!i:!!!!II:I::i:i!!!!:!::I:I!:I!!!!I:1:1:ii:!!:1I!!I!:!:::Ii::iil:!i!!:i!l:iI::lIi:::I!IiIlIlIl!!I:!il:!i:ill_ill:II1I::::!i:::::i!:li:i:i!:i:!::::il::i::!!!!!:!::i:i:i::!::::i:!:!!:!:!:::i!!!!!!!:!:i:lilll:::i:i::::!:i::i!:I!:I:I:I::i::::::
NEW HAMPSHI  $2.85/  AWP

$3. 
NEW JERSEY  $3.73 AWP mius

$4.  store-specifc 
discount 
(0-6% ) 
NEW MEXICO  $3.  A WP mius 10% 
NEW YORK  $2.  AWP 
NORTH CAROLINA  $4.  AWP 
NORTH DAKOTA  $3.  AWP 
OHIO  $3.  AWP mius 7%

OKLAHOMA  $3.  A WP mius 10% 
OREGON  $3.52 or  AWPmius 11% 
$3. 
PENNSYLVAN  $2.  AWP 
RHODE ISLAND  $3.  Lower of A WP or 
Usual & Customar 
SOUT CAROLINA  $3.  AWPmius 9. 
SOUT DAKOTA
 $4.  AWPmius 10.5% 
TENNSSEE  $4.  AWP mius 7%

TES 
$3.  Lower of

AWP mius 10%

or WAC plus 12% 
UTAH  $3.  AWPmius 12%

VERMONT  $2.75 or  AWP

Drg 
10% of  :::::::::: ::: ~~~~~
:iii!illl.III:: 
:::j:il&II:::::i!!!!!:!:!iii:::!!:::!:ii!:!!:!i:iii:!:!  !:i:i:!!I:!:::i:i:il!::!;\:i:l!!!:!:!:!!:i::!!::ii:i!i!!!lii!ii::i::iiiji!!ii!i: ::::i:::::i:i i::i:!:i:i:::i:::i: i:ii:i::::li:i! !:i!::::!!:III:::!::!: i:i:!:!:!i::!i::::::: 
VIGIN 
$3.  Lower of A WP or 
Usual & Customar 
WASHIGTON	 $3. 15, $3.  AWPmius 11% 
or $4.20, base 
on # of Rxs. 
WEST VIRGINA	 $2.  AWP 
WISCONSIN	 $3.72 (non-unit)  AWP 
$5.73 (unit dose) 
WYOMIG	 $4.  AWP 
DEFINIONS: 
EAC:  Estimated Acquisition Cost 
WAC:  Wholesale Acquisition Cost 
AWP:  Average Wholesale Prce 
SOURCES OF INORMATION: 
National Phanaceutic	 Pharmceutical Benefits Under State Medical
Council, Inc. 

Assistanc  September 1989. 
Program. 
Telephone calls to State Medcaid Agencies.  APPENDIX C 
PURSUE COST CONTAINMENT 
GEORGIA CONTINUES  TO 
FOR MEDICAID PHARMACY SERVICES 
The Georgia legislatue passed a law this year (1989) which: 
permts the State s Deparent of Medcal Assistace (DMA) to solicit 
competitive bids from pharaceutical manufactuers and distrbutors to become 
the sole suppliers of specified drgs for all Medicaid clients; 
requis successful biddrs to pay rebates to the State; 
stipulates for any drg on the bid list, if no acceptable bids are received, the 
DMA may: 
contract with a single supplier, or 
prohibit reimbursement to vendors who have not submitted a bid; and 
allows the DMA to set Medicaid reimbursement limits on the duration of 
prescriptions for selected drgs where the manufactuer claims effectiveness 
within a cenain period of time; requires prior approval for continued coverage. 
The DMA did not reeive any acceptable bids under the competitive biddig provisions of the 
new law. In addition, manufacturs have sought a tempora restrning order to stop 
implementation of the law. The DMA offcials contated durng this inspection indicated, 
however, that the bid solicitation process wil be re-opened in 1990.