I  , 
~ L.V2 c. , 
DEPARTMENT  OF  HEALTH  & HUMAN  SERVICES  Office  of  Inspector  General 
Memorandum 
.JUL 7 I994 
Date 
From 
Subject  Medicaid  Progr&@&ngs  Through  the  Use  of Therapeutically  Equivalent  Generic 
Drugs  (A-06-93-00008) 
TO 
Bruce  C.  Vladeck 
Administrator 
Health  Care  Financing  Administration 
Attached  are  two  copies  of  our  final  report  on  our  review  of  the  potential  extended 
use  of  generic  outpatient  prescription  drugs  in the  Medicaid  program.  The  purpose 
of  our  review  was  to  study:  (1) efforts  taken  by  State  Medicaid  programs  and 
selected  private  and  public  health  benefit  programs  to encourage  the  use  of  less 
costly  generic  prescription  drug  products  and  (2) the  financial  impact  of  changing 
Federal  regulations  to  limit  reimbursement  of brand  name  drugs  to  the  amounts  set 
by  the  Health  Care  Financing  Administration  (HCFA)  for  equivalent  generic  drugs. 
We  found  that  11 State  Medicaid  programs  have  policies  in place  that  promote  the 
use  of  generic  drugs  beyond  the  current  Federal  requirements.  We  also  found  that 
use  of  generic  drugs  was  being  promoted  by  other  programs  that  provide  health 
benefits.  Some  programs  require  generic  substitution  when  generic  drugs  are 
available,  while  others  use  financial  incentives  as part  of  their  reimbursement  policy. 
We  calculated  that  the  annual  cost  savings  to the  Medicaid  program  could  be  as 
much  as  $46  million  for  only  37 high  volume  dispensed  brand  name  drugs,  if the 
reimbursement  for  those  drugs  is limited  to the  amounts  set by  HCFA  for  equivalent 
generic  drugs.  The  cost  savings  will  become  even  greater  in the  future  as the 
Federal  patents  on  exclusive  drug  manufacturing  of  60  important  highly  used  drugs 
with  more  than  $10  billion  in sales  will  expire  between  now  and  1995.  Therefore, 
we  are  recommending  that  HCFA  identify  and  alert  States  to methods  which  would 
encourage  the  use  of  lower  priced  generic  drug  products  in the  Medicaid  program. 
In  response  to our  draft  report,  HCFA  stated  that  our  report  effectively  described 
best  practices  and  agreed  to  share  our  report  with  all State  agencies.  However, 
HCFA  expressed  concerns  regarding  our  recommendation  that  they  seek  legislative 
authority  to  require  States  to adopt  policies  to encourage  generic  drug  substitution  or 
to  limit  Federal  financial  participation  to amounts  based  on  generic  drug  prices 
rather  than  brand  name  drug  prices.  Page  2 - Bruce  C.  Vladeck 
We  considered  HCFAs  concerns  and  revised  this  recommendation.  And,  we  are 
also  recommending  that  HCFA:  (1)  take  a more  active  role  to  encourage  States 
to  use  generic  drugs  and  provide  stronger  incentives  for  States  to  adopt  policies 
that  encourage  use  of  generic  drugs;  and  (2)  monitor  the  States  efforts  to 
encourage  the  use  of  lower  priced  generic  drugs  and  formally  assess  those 
activities. 
Please  advise  us within  the  next  60 days  on  actions  taken  or  planned  on  our 
recommendations.  If you  have  any  questions,  please  call  me  or  have  your  staff 
contact  George  M.  Reeb,  Assistant  Inspector  General  for  Health  Care  Financing 
Audits,  at  (410)  966-7104.  Copies  of  this  report  are  being  sent  to  other 
interested  Department  officials. 
To  facilitate  identification,  please  refer  to  Common  Identification 
Number  A-06-93-00008  in  all correspondence  relating  to  this  report. 
Attachments  Department  of  Health  and  Human  Services 
OFFICE  OF 
INSPECTOR  GENERAL 
MEDICAID  PROGRAM  SAVINGS 
THROUGH  THE  USE  OF 
THERAPEUTICALLY  EQUIVALENT 
GENERIC  DRUGS 
JU-lW  GIBBS  BROWN 
Inspector  General 
NLY  1994 
A-06-93-08  DEPARTMENT  OF  HEALTH  & HUMAN  SERVICES  Office  of  inspector  General 
Memorandum 
. JUL  7 I994 
Date 
From 
Subject  Through  the  Use  of  Therapeutically  Equivalent 
To 
Bruce  C.  Vladeck 
Administrator 
Health  Care  Financing  Administration 
This  report  provides  you  with  the  results  of  our  review  of  the  potential  extended 
use  of  generic  outpatient  prescription  drugs  in  the  Medicaid  program.  The 
purpose  of  our  review  was  to  study:  (1)  efforts  taken  by State  Medicaid 
programs  and  selected  private  and  public  health  benefit  programs  to  encourage 
the  use  of  less  costly  generic  prescription  drug  products  and  (2)  the  financial 
impact  of  changing  Federal  regulations  to  limit  reimbursement  of  brand  name 
drugs  to  the  amounts  set  by the  Health  Care  Financing  Administration  (HCFA) 
forequivalent  generic  drugs. 
We  found  that  11 State  Medicaid  programs  have  policies  in  place  that  promote 
the  use  of  generic  drugs  beyond  the  current  Federal  requirements.  We  also 
found  that  use  of  generic  drugs  was  being  promoted  by  other  programs  that 
provide  health  benefits.  Some  programs  require  generic  substitution  when 
generic  drugs  are  available,  while  others  use  financial  incentives  as  part  of  their 
reimbursement  policy. 
We  calculated  that  the  annual  cost  savings  to  the  Medicaid  program  could  be  as 
much  as  $46  million  for  only  37 high  volume  dispensed  brand  name  drugs,  if the 
reimbursement  for  those  drugs  is limited  to  the  amounts  set  by  HCFA  for 
equivalent  generic  drugs.  The  cost  savings  will become  even  greater  in the 
future  as  the  Federal  patents  on  exclusive  drug  manufacturing  of  60  important 
highly  used  drugs  with  more  than  $10  billion  in sales  will expire  between  now 
and  1995.  Therefore,  we  recommend  that  HCFA  identify  and  alert  States  to 
methods  which  would  encourage  the  use  of  lower  priced  generic  drug  products  in 
the  Medicaid  program.  Promising  approaches,  such  as  those  discussed  in this 
report,  have  the  potential  for  reducing  Medicaid  expenditures  without  adversely 
impacting  quality  of care. 
In  response  to  our  draft  report,  HCFA  stated  that  our  report  effectively 
described  best  practices  and  agreed  to  share  our  report  with  all State  agencies. 
The  full  text  of  HCFAs  comments  are  included  in Appendix  B.  I  .  t 
Page  2 - Bruce  C.  Vladeck 
However,  HCFA  expressed  concerns  regarding  our  recommendation  that  they 
seek  legislative  authority  to  require  States  to  adopt  policies  to  encourage  generic 
drug  substitution  or  to  limit  Federal  financial  participation  (FFP)  to  amounts 
based  on  generic  drug  prices  rather  than  brand  name  drug  prices. 
We  considered  HCFAs  concerns  and  revised  this  recommendation.  And,  we  are 
also  recommending  that  HCFA:  (1)  take  a more  active  role  to  encourage  States 
to  use  generic  drugs  and  provide  stronger  incentives  for  States  to  adopt  policies 
that  encourage  use  of  generic  drugs;  and  (2)  monitor  the  States  efforts  to 
encourage  the  use  of  lower  priced  generic  drugs  and  formally  assess  those 
activities. 
BACKGROUND 
A  generic  drug  is an  equivalent  version  of  the  pioneer  or  brand  name  drug 
originally  manufactured.  The  generic  drug,  however,  is not  marketed  until  the 
brand  name  drugs  Federal  patent  on  exclusive  manufacturing  rights  has  expired. 
The  Food  and  Drug  Administration  (FDA)  is responsible  for  approving  generic 
versions  of  brand  name  drug  products.  For  purposes  of  this  report,  we  use  the 
term  generic  to  refer  only  to  drug  products  that  have  been  categorized  as A 
rated  equivalents  by  the  FDA. 
In  order  for  a generic  drug  to  be  granted  a category  A approval  from  the  FDA, 
the  drug  must  be  bioequivalent  to  its brand  name  counterparts.  Bioequivalency 
means  that  generic  drugs  must  contain  the  same  active  chemical  ingredients  and 
be  identical  to  brand  name  drugs  in  strength,  dosage  form,  and  route  of 
administration.  Also,  the  generic  manufacturers  must  submit  evidence  to  the 
FDA  that  their  drugs  will  have  the  same  therapeutic  effect  as  the  brand  name 
counterparts.  This  means  that  generic  products  can  be  expected  to  deliver  to  the 
bloodstream,  or  other  site  where  the  drug  does  its work,  the  same  amount  of 
active  ingredients  as  the  original  product.  According  to  the  FDA,  when  the  same 
amount  of  active  ingredients  of  the  generic  version  gets  into  the  bloodstream  at 
the  same  rate  as  the  brand  name  version,  there  is no  scientific  reason  to  believe 
that  the  effects  of  the  two  drugs  will  differ. 
The  Drug  Price  Competition  and  Patent  Restoration  Act  of  1984  encouraged  the 
introduction  of  generic  competition,  accelerating  the  approval  process  for  generic 
drugs  by  allowing  use  of  research  undertaken  on  the  behalf  of  the  pioneer 
product  to  gain  generic  approval. 
The  generic  drug  manufacturing  industry  is expected  to  continually  grow  in  this 
decade.  According  to  Forrune  magazine,  the  Federal  patents  of  60 important 
highly  used  drugs  with  more  than  $10  billion  in  sales  will  expire  between  now 
and  1995,  including  half  of  Americas  10 best-selling  products.  The  best-selling  I  , 
Page  3 - Bruce  C.  Vladeck 
products  coming  off  patent  include:  Cardizem,  Tagamet,  Ceclor,  Seldane,  and 
Naprosyn.  Additionally,  according  to  the  FDA,  about  80 percent  of  the  generic 
drug  production  is currently  performed  by brand  name  firms. 
Prescription  Drugs  in  the  Medicaid  Program 
Under  Medicaid,  reimbursement  for  drugs  is generally  based  upon  ingredient 
costs  plus  a reasonable  pharmacy  dispensing  fee.  Effective  October  29,  1987, 
Federal  regulations  limited  the  amount  which  Medicaid  reimbursed  for  drugs 
with  available  generic  drugs  to  a Federal  upper  limit  price  (FULP).  This  upper 
limit  amount  is  150 percent  of  the  lowest  priced  generic  equivalent  drug  that  is 
available  plus  a reasonable  dispensing  fee.  The  HCFA  is responsible  for 
identifying  and  publishing  a list  of  the  drugs  with  FULPs. 
Under  Federal  regulations,  States  have  the  flexibility  to  pay  more  for  some 
upper  limit  drugs  and  less  for  others.  However,  States  claims  for  FFP  cannot 
exceed  the  aggregate  of  the  individual  FULP  for  all upper  limit  drugs. 
Additionally,  FULP  limits  do  not  apply  to  drug  purchases  where  prescribing 
physicians  certify  in  their  handwriting  on  the  prescription  form  that  a specific 
brand  is medically  necessary.  Physicians  are  not  required  to  provide  any  specific 
medical,  scientific,  or  diagnostic  information  regarding  their  brand  name 
decisions.  The  payment  limits  for  brand  name  drugs  are  based  on  estimated 
acquisition  costs  of  the  drugs  rather  than  the  FULP  amount  and  are  usually 
higher  than  the  FULP  amount. 
SCOPE 
Our  review  was  performed  in accordance  with  generally  accepted  government 
auditing  standards.  The  objectives  of  our  review  were  to  study:  (1)  efforts  taken 
by  State  Medicaid  programs  and  selected  private  and  public  health  benefit 
programs  to  encourage  the  use  of  less  costly  generic  prescription  drug  products 
and  (2)  the  financial  impact  of  changing  Federal  regulations  to  limit 
reimbursement  of  brand  name  drugs  to  the  amounts  set  by  HCFA  for  equivalent 
generic  drugs.  Our  objectives  did  not  require  that  we  identify  or  review  any 
internal  control  systems. 
We  interviewed  officials  from  the  Medicaid  programs  of  49 States  and  the 
District  of  Columbia  concerning  the  reimbursement  of  brand  name  drugs.  We 
reviewed  10 State  pharmaceutical  assistance  programs  that  provide  financial 
assistance  for  prescription  drugs  to  elderly  populations.  Additionally,  we 
reviewed  the  1993  drug  benefits  of  seven  fee-for-service  plans  and  nine  prepaid 
plans  in  the  Federal  Employees  Health  Benefits  (FEHB)  programs.  . 
,_  . 
Page  4 - Bruce  C.  Vladeck 
We  reviewed  the  HCFA  Federal  upper  limit  list  for  generic  drugs  in  effect  as  of 
July  29,  1993  and  the  drug  pricing  file  of  the  Arkansas  Medicaid  program.  The 
list  of  the  top  200  drugs  was  obtained  from  Phamzacy  Times  and  American 
Druggkt.  We  obtained  drug  utilization  information  from  the  Medicaid  Drug 
Rebate  Database  of  the  HCFA  Data  Center  for  the  4 quarters  ending  June  30, 
1992.  We  also  referred  to  other  studies  and  references,  which  are  listed  at  the 
end  of  this  report. 
For  information  on  the  savings  calculation,  see  Appendix  k 
We  did  not  independently  verify  any  information  obtained  from  third  party 
sources.  Our  review  was  conducted  jointly  by  our  Office  of  Audit  Services  field 
office  in  Little  Rock,  Arkansas  and  our  Office  of  Evaluation  and  Inspections 
regional  offjce  in  Philadelphia,  Pennsylvania.  The  review  was  conducted  from 
October  1992  to  September  1993.  The  HCFA  did  not  have  an  opportunity  to 
comment  on  the  second  recommendation  which  was  revised  in  our  final  report.  t 
,I 
. 
Page  5 - Bruce  C.  Vladeck 
FINDLNGS  AND  RECOMMENDATIONS 
State  Medicaid  programs,  as well  as  other  health  benefit  programs,  have  taken 
steps  to  encourage  the  use  of  generic  drugs.  We  found  many  different  policies  in 
place  to  encourage  the  use  of  generic  drugs,  ranging  from  a restriction  on  brand 
name  drugs  when  generic  drugs  are  available,  to  cost  incentives  for  beneficiaries 
and  for  pharmacists  to  select  generic  drugs  in  preference  to  brand  name  drugs. 
We  calculated  that  the  annual  cost  savings  to  the  Medicaid  program  could  be  as 
much  as  $46  million  for  only  37 high  volume  dispensed  brand  name  drugs,  if the 
override  provision  (that  which  allows  physicians  to  state  brand  name  drugs  must 
be  dispensed)  for  brand  name  drugs  is totally  eliminated. 
State  Medicaid  Programs  Have  Taken  Steps 
to  Encourage  the  Use  of  Generic  Drugs 
Eleven  State  Medicaid  programs  have  taken  steps  to  encourage  the  use  of 
generic  drugs  beyond  the  Federal  requirement  that  payment  for  brand  name 
drug  products  will  not  be  made  unless  the  physician  certifies  medical  necessity. 
These  steps  include  limiting  Medicaid  reimbursement  to  the  FULP  and  requiring 
prior  authorization  for  brand  name  products  that  are  on  the  FULP  list.  State 
officials  believe  that  their  efforts  have  been  successful  in  reducing  expenditures. 
These  State  officials  pointed  to  the  small  number  of  overrides  processed  by  their 
States  as  measures  of  success.  Two  States  provided  annual  savings  estimates  of 
$1.5  million  and  $5 million,  respectively. 
We  found  that  two  States  had  restrictive  policies  that  did  not  allow  physicians  to 
override  the  FULP  for  brand  name  drugs.  However,  one  State  had  recently 
allowed  exceptions  to  that  policy  for  the  anticonvulsive  class  of  drugs.  Officials 
from  the  States  informed  us  that  they  were  not  aware  of  any  adverse  medical 
problems  encountered  by their  Medicaid  recipients  as  a result  of  these  policies. 
An  official  from  another  State  informed  us that  the  State  had  a similarly 
restrictive  policy  in  that  only  brand  name  drugs  on  the  States  negative  formulary 
could  be  reimbursed  for  more  than  the  FULP  amount.  The  official  explained 
how  the  State  arrived  at  this  policy.  In  1989,  the  State  performed  an  internal 
review  which  found  that  the  utilization  of  brand  name  products  appeared  to  be 
geographically  limited.  In  fact,  one  county  and  its  surrounding  subdivision 
accounted  for  86 percent  of  claims  paid  for  brand  name  drugs  certified  as 
medically  necessary  and  87 percent  of  the  total  dollars  statewide  for  medically 
necessary  certified  prescriptions  while  comprising  only  26  percent  of  the 
Medicaid  eligible  population.  The  State  calculated  that  discontinuing  the  option 
of  brand  name  specification  would  save  a minimum  of  $1.5  million  in  the  one 
county  alone.  Page  6 - Bruce  C.  Vladeck 
Officials  from  seven  States  informed  us that  they  had  placed  brand  name  drugs  with 
FULPs  on  prior  authorization  approval.  Prior  authorization  requires  physicians  to 
request  and  receive  official  permission  before  a particular  drug  can  be dispensed. 
The  request  can  be  by  phone,  fax,  or  mail.  In  most  cases,  the  State  requires 
information  on  the  patient  and  a medical  justification  as to why  the  generic  drug 
cannot  be dispensed.  The  detail  of the  medical  justification  differs  among  the 
States.  For  example,  one  State  requires  information  on  whether  or  not  the  patient 
had  a trial  of  a generic  drug  product,  and  if the  generic  drug  was  tried,  the  results 
of the  trial,  and  if the  generic  drug  was  not  tried,  the  medical  reason  that  such  a 
trial  would  be  inappropriate. 
One  State  official  reported  that  the  State  had  implemented  a policy  that  required  the 
physician  to take  an additional  step  in order  to prescribe  a brand  name  drug  with  a 
FULP.  In  addition  to physicians  certifying  that  a brand  name  drug  is medically 
necessary,  they  must  also  certify  the  reason  that  the  brand  name  drug  is necessary. 
Additionally,  some  States  require  varying  copayment  amounts  which  can  further 
promote  the  use  of  generic  drugs. 
State  Pharmaceutical  Assistance  Programs 
are  Promoting  the  Use  of  Generic  Drugs 
Nine  of the  10 State  pharmaceutical  assistance  programs  for  the  elderly  or 
low-income  people  we  reviewed,  mandate  or  provide  incentives  for  using  generic 
drugs  over  brand  name  products.  Seven  States  mandate  the  dispensing  of  generic 
drugs  in place  of  brand  name  products  when  available.  However,  six  of  these 
States  will  allow  brand  name  products  to  be  dispensed  when  physicians  indicate 
there  should  be  no  substitution. 
In  five  States  with  mandatory  substitution,  the  programs  provide  additional 
incentives  to  encourage  the  use  of  less  costly  generic  drugs.  One  State  requires 
that  prescriptions  only  be  filled  with  the  generic  drug.  Another  State  requires  that 
the  prescriber  provide  a justification  for  the  brand  name  drug  used.  In  two  States, 
the  copayment  increases  for  brand  name  products.  For  example,  in  one  of  the  t\vo 
States,  a copayment  of  $3.00  is required  for  a(T eneric  drugs  \\.hilc  the  copayment  for 
brand  name  drugs  is  $5.00.  Finally,  one  State  requires  that  the  actual  prescription 
be  provided  if  the  prescription  was  telephoned  or  faxed  to  the  pharmacy  in  order  to 
dispense  a  brand  name  drug  when  a generic  drug  is  available. 
In  all  three  States  without  mandatory  substitution,  the  use  of  ~cncric  drugs  is 
encouraged  through  increased  cost  sharing  for  recipients.  011~2S tate  requires  the 
recipient  to  pay  the  differcncc  bctwccn  the  cost  of  the  gcncric  drug  a11d the  cost  Page  7 - Bruce  C.  Vladeck 
of  the  brand  name  drug.  The  other  two  States  require  the  recipient  to  pay  a 
percentage  of  the  price  of  the  drug.  Since  recipient  cost  sharing  amounts 
increase  for  higher  priced  drugs,  there  is an  incentive  to  choose  lower  priced 
generic  products.  One  State  further  encourages  generic  drug  substitution  by 
reimbursement  incentives  to  pharmacies.  The  State  pays  a $1.00  dispensing  fee 
to  pharmacies  for  brand  name  products  and  a $5.00  dispensing  fee  for  generic 
products. 
FEHB  Plans  Encourage  the  Use  of  Generic  Drugs 
Eight  of  the  16 FEHB  plans  that  we  reviewed  encouraged  the  use  of  generic 
drugs  by requiring  the  beneficiary  to  pay  more  for  brand  name  drugs.  Nine  of 
the  16 plans  were  prepaid  health  plans  (e.g.,  a health  maintenance  organization) 
and  7 were  fee-for-service  health  pl;lns.  The  method  most  frequently  used  by 
both  prepaid  and  fee-for-service  health  plans  to  encourage  use  of  generic  drugs 
is recipient  cost  sharing. 
Four  of  the  nine  prepaid  health  plans  encouraged  the  use  of  generic  drugs 
through  higher  copayments  for  brand  name  drugs.  The  difference  in  copayment 
amounts  per  prescription  ranged  from  $2.00  to  $5.00.  For  example,  one  prepaid 
plan  required  a $5.00  copnymcnt  per  prescription  or  refill  for  a generic  drug  and 
a $10.00  copayment  per  prescription  or  refill  for  brand  name  drugs. 
All  seven  of  the  fee-for-service  plans  required  the  recipient  to  make  copayments 
at  the  pharmacy  of  up  to  40  percent  of  the  cost  of the  prescription.  Five  of  the 
seven  plans  have  mail-order  programs.  Four  of  the  mail  order  prescription  drug 
programs  require  21h igher  copayment  for  brand  name  drugs. 
Savings  to  the  Medicaid  Program  Can  Be 
Achieved  Through  Increased  Use  of  Generic  Drugs 
Our  estimate  showed  that  substantial  savings  could  be  achieved  in  the  Medicaid 
program  by  restricting  the  physician  override  for  brand  name  drugs  with  FULPs. 
We  calculated  that  the  annual  savings  could  be  as  much  as  $46  million  for  only 
37 high  volume  brand  name  drugs,  if the  override  provision  is totally  eliminated. 
While  the  elimination  of  the  override  provision  might  seem  to  be  an  extreme 
position,  two  States  already  have  policies  in  place  that  do  not  permit  the  override 
of  FULP  drugs  (with  the  exception  of  anticonvulsive  drugs  in  one  State). 
Appendix  A explains  how  our  calculation  was  made.  Our  estimate,  although  not 
a scientific  statistical  sample  projection,  shows  that  the  possible  savings  are 
substantial.  I  . 
Page  8 - Bruce  C.  Vladeck 
CONCLUSIONS  AND  RECOMMENDATION 
The  use  of  generic  drugs  in  place  of  prescribing  and  dispensing  brand  name 
drugs  is being  encouraged  by  State  Medicaid  programs  as well  as  other  third 
party  payers.  While  the  use  of  generic  drugs  within  the  Medicaid  program  is 
already  encouraged  through  HCFAs  FULP  listing,  11 States  have  policies  in 
place  that  either  prohibit,  or  discourage  the  override  of  FULP,  thereby 
promoting  dispensing  of  the  lower  priced  generic  drugs.  Nine  of  10 State 
pharmaceutical  assistance  programs  that  we  reviewed  mandate  or  provide 
incentives  for  using  generic  drugs  over  brand  name  products.  Eight  of  16 FEHB 
plans  that  we  reviewed  promote  the  use  of  generic  drugs  through  higher 
copayment  requirements  or  reduced  reimbursement. 
Our  estimate  showed  that  substantial  savings  could  be  achieved  in  the  Medicaid 
program  by  restricting  the  physician  override  for  brand  name  drugs  with  FULPs. 
We  calculated  that  the  annual  savings  could  be  as  much  as  $46  million  for 
37 high  volume  brand  name  drugs.  We  believe  that  the  potential  cost  savings 
will  become  even  greater  in  the  future  as  the  Federal  patents  of  60 important 
highly  used  drugs,  with  than  $10  billion  in sales,  will  expire  between  now 
more 
and  1995.  Included  in  the  60  5 of  the  top  10 best-selling  drugs.  Therefore, 
are 
in  the  short  term,  we  recommend  that  HCFA  identify  and  alert  States  to 
methods  which  would  encourage  the  use  of  lower  priced  generic  products  in the 
Medicaid  program.  Promising  approaches,  such  as  those  discussed  in  this  report, 
have  the  potential  for  reducing  Medicaid  expenditures  without  adversely 
impacting  quality  of  care. 
We  also  recommend  that  HCFA:  (I)  take  a more  active  role  to  encourage 
States  to  use  generic  drugs  and  provide  stronger  incentives  for  States  to  adopt 
policies  that  encourage  use  of  generic  drugs;  and  (2)  monitor  the  States  efforts 
to  encourage  the  use  of  lower  priced  3(y eneric  drugs  and  formally  assess  those 
activities.  After  assessment  of  the  State  efforts  and  results,  HCFA  could  better 
determine  if additional  or  different  measures  are  needed  to  ensure  that  lower 
priced  generic  drugs  art:  used  whenever  appropriate. 
HCFAS  COMMENTS 
The  HCFA  commented  on  the  draft  report  and  the  full  text  of  their  comments 
appears  in  Appendix  B.  The  HCFA  generally  concurred  with  the  first 
recommendation  but  did  not  concur  with  the  second  recommendation  contained 
in  our  draft  report. 
In  responsr  to  our  first  recommendation,  HCFA  agreed  that  savings  to  the 
Medicaid  program  would  result  if States  instituted  programs  encouraging  the  use  Page  9 - Bruce  C.  Vladrck 
of  generic  drugs.  The  HCFA  also  stated  that  our  report  effectively  describes 
best  practices  and  agreed  to  share  our  report  with  all  State  Medicaid  agencies. 
The  HCFA  did  not  concur  with  the  second  recommendation  contained  in  our 
draft  report.  We  considered  HCFAs  concerns  and  revised  our  second 
recommendation  to  address  those  issues  in  this  final  report. 
OIGS  RESPONSE 
By  agreeing  to  share  our  report  with  all  of  the  States,  we  believe  that  HCFA  has 
/ 
taken  a positive  step  toward  encouraging  the  use  of  lower  priced  generic  drugs. 
There  is a major  trend  taking  place  in both  public  and  private  health  programs 
t  discouraging  the  use  of  brand  name drugs  and  requiring  the  greater  use  of 
generic  drugs.  The  HCFAs  FULPs  has  been  a successful  means  to  limit  the  use 
of  brand  name  drugs  in  the  Medicaid  drug  program.  We  recognize  that  States 
currently  have  the  flexibility  to  encourage  the  use  of  generic  drugs  and  that  the 
Omnibus  Budget  Reconciliation  Act  of  1993  has  given  States  other  means  to 
limit  the  use  of  brand  name  drugs.  However,  most  States  have  not  taken  the 
opportunity  to  use  this  tlexibility  to  encourage  the  use  of  generic  drugs. 
In  order  to  encourage  the  use  of  generic  drugs,  we  are  not  proposing  that  States 
eliminate  physician  overrides  for  the  use  of  brand  name drugs  or  that  prior 
authorization  programs  be  established.  These  decisions  should  be  left  to  the 
States  discretion  in  order  to  allow  them  the  necessary  flexibility  to  operate  their 
programs.  However,  we  believe  that  HCFA  has  an  opportunity  to  do  more. 
Thus,  we  have  revised  the  second  recommendation  contained  in  this  final  report.  APPENDIX  A 
Page  1 of  2 
Calculation  of  Potential  Savings  to  Medicaid  Program 
We  selected  all  brand  name  drugs  that  appeared  on  the  HCFA  FULP  and  were  listed  in the 
top  200  drugs  for  1991  by  P/znrnancy  Times  and  Annzricmz  Drugisi.  There  were  37 drugs 
that  met  these  requirements. 
After  identifying  the  drugs,  we  determined  the  different  strengths  available  for  each  drug 
from  the  1991  Red  Book--an  annual  pharmacists  reference  guide  for  drug  pricing, 
packaging,  product  identification,  and  manufacturer  names  and  addresses.  We  then 
obtained  the  number  of  units  dispensed  for  each  drug  by  the  Medicaid  program  of  each 
State  for  the  four  quarters  ended  June  30,  1992.  This  utilization  information  is reported 
quarterly  by  the  States  to  HCFA  as part  of  the  Medicaid  drug  rebate  program.  The 
information  was  not  available  for  all  States  for  all  four  quarters.  Nevertheless,  we  computed 
our  savings  estimate  based  on  the  data  that  was  available.  (The  savings  estimate  was  for  46 
States  for  the  third  quarter  of  1991  and  the  first  quarter  of  1992,  44  States  for  the  fourth 
quarter  of  199 1 and  47  States  for  the  second  quarter  of  1992.  We  also  excluded  the  two 
States  that  did  not  permit  overrides.) 
When  a physician  certifies  that  a brand  name  drug  is necessary,  the  States  reimburse  the 
estimated  acquisition  cost  of  the  drug  rather  than  the  FULP  for  the  ingredient  cost  portion 
of  the  drug.  We  did  not  determine  the  actual  State  payment  for  the  drug,  since  this 
information  was  not  readily  available.  We  did,  however,  survey  each  State  to  determine 
their  reimbursement  basis  for  the  ingredient  cost  of  drugs.  Most  of  the  States  reimburse 
based  on  the  average  wholesale  price  (AWP)  of  a drug  less  some  percentage.  Therefore, 
we  obtained  AWP  for  each  drug  as of  July  29,  1993.  We  then  calculated  the  ingredient 
cost  for  each  drug  for  each  State.  If a State  used  another  reimbursement  methodology,  we 
used  AWE less  10.5  percent.  We  used  10.5 percent  because  it was  the  most  conservative 
percentage  frequently  used  by  the  States  to  calculate  reimbursement  to  pharmacies  for 
ingredient  costs. 
Next,  we  compared  the  calculated  ingredient  cost  to  the  FULP  for  each  drug  and  multiplied 
the  difference  between  the  two  by  the  number  of  units  dispensed  for  each  drug  for  each 
State.  These  calculations  produced  a cost  savings  of 
$93  million  for  the  37 drugs.  IHowever,  the  savings  estimate  does  not  account  for  any 
difference  in  drug  rebates  that  might  occur  from  dispensing  generic  drugs  rather  than  brand 
name  drugs. 
In order  to  approximate  the  difference  in dru, (r rebates,  WC identified  a generic  drug  for each 
of  the  37  drugs.  We judgmentally  selected  the  generic  drugs.  After  identifying  the  generic 
drugs,  we  obtained  the  unit  rcbatc  amounts  for  the  37 brand  name  drugs  and  the 
corresponding  generic  drugs.  We  used  the  unit  rebate  amounts  for  the  first  quarter  of  1993, 
which  was  the  latest  data  available.  WC computed  the  rebate  difference  by  subtracting  the  APPENDIX  A 
Page  2  of  2 
generic  unit  rebate  amount  from  the  brand  name  unit  rebate  amount  and  multiplying  the 
difference  by  the  total  utilization  for  each  drug  for  the  four  quarters  ended  June  30,  1992. 
These  calculations  showed  that  the  rebate  for  the  generic  drugs  would  be  $47  million  less 
than  the  rebate  for  the  brand  name  drugs.  Therefore,  our  cost  savings  estimate  of  $93 
million  would  be  adjusted  to  $46  million  after  accounting  for  the  rebates.  I  4 
Appendix  B 
EfCFA  Comments  to Draft  Report  Page  1 of 3 
Health Care 
DEPARTMENT  OF tiE.4LTH8:  HUMAN  SERVICES  Financmg AdmlnistratlOn 
.__~~_._ 
Memorandum 
AFR  14  1994 
Date 
Bruce  C.  Vladec 
Ftom 
Administrator 
Subject  Office  of  luspector  General  (OIG)  Draft  Report:  Medicaid  Program  Savings 
Through  the  Use  of Therapeutically  Equivalent  Generic  Drugs  (A-06-93-00008) 
To 
June  Gibbs  Brown 
Inspector  General 
We  reviewed  the  above-referenced  draft  report  on  the  use  of  generic  outpatient 
prescription  drugs  in  the  Medicaid  program. 
We  offer  an  alternative  approach  to  the  first  recommendation  presented  in  the 
report.  We  do  not  concur  with  the  second  recommendation.  Our  detailed 
commcntS  are  attached. 
Thank  you  for  tbc  opportunity  to  review  and  comment  on  this  draft  report. 
Please  advise  us  if you  would  like  to  discuss  our  position  on  the 
recommendations  at your  earliest  convenience. 
ACtachment  Appendix  B 
HCFA  Comments  to  Draft  Report  Page  2 of 3 
Comments  on Office  of inspector  General  (OIG)  Draft  Reuort: 
Medicaid  Proe:ram  Savings Through  the  Use  of 
Therapeutically  Equivalent  Generic  Drugs 
[A-06-93-00008) 
Recommendation  1 
In the  short  term,  the  Health  Care  Financing  Administration  (HCFA)  should 
identify  and  alert  States  to methods  which would  encourage  the  use of lower 
priced  generic  products  in the  Medicaid  program. 
HCFA  Response 
We  agree  that  if States  institute  programs  to encourage  the  use  of generic  drugs, 
savings  to the  Medicaid  program  could  result.  However,  we do not  believe  that 
alerting  States  to the  steps  that  some  States  have  taken  to encourage  greater  use 
of generic  drug  products  would  be fruitful.  These  measures  are  already  known 
to State  agencies.  As a result  of the prior  approval  process  incorporated 
in the  Omnibus  Budget  Reconciliation  Acts  of  1990 and  1993 (OBRA  90 and 
OBRA  93), State  agcncics  are  aware  that  they  can  subject  any  drugs which  they 
believe  are  being  overutilizcd  to prior  authorization.  However,  we believe  that 
your  report  effectively  describes  best practices  and will send  a copy  of the 
report  to all State  agencies  for their  information  if you  supply  us with an 
electronic  copy. 
(See Auditors  Note below) 
Recommendatio& 
HCFA  should  seek  legislative  authority  to require  States  to adopt  policies  to 
encourage  generic  drug  substitution  or to limit  Federal  financial  participation 
(FFP)  to amounts  based  on generic  drug  prices  rather  than  brand  name  drug 
prices.  \Vhile  States  could  have  some  flexibility  in which  method  to adopt,  the 
Federal  Government  could  require  that  such  policies  exist as a condition  of 
receiving  FFP,  or  limit  FFP  to the  amount  that  would  have  been  paid  had  the 
generic  drug  been  dispensed. 
HCFA  Response 
We do  not  concur.  We believe  the  recommendation  to seek  legislative  authority 
to require  States  to  limit reimbursement  IO generic  drugs  is problematic  for  a 
number  of reasons. 
States  currently  have  the  flexibility  to encourage  the  use of generic  drugs,  as 
specific  examples  in your  report  show.  OBRA  93 reinstated  States  ability  to 
institute  drug  formularies  so that  States  can  exclude  brand  name  drugs  from  their 
Auditors  Note:  2 thnt HCFA  is referrilvg  to in its response 
RCconullCntl~ltit,M 
hllS  hCEn  rCVi.Wt~  in  th?find  ri?pJrt  diiC  t0  HCFA  S  COncernS.  Appendix  B 
HCFA  Comments  to  Draft  Report  Page  3 of 3 
Page  2 
formularies  if certain  conditions  are  met  One  condition  is that  State  agencies 
allow  for  the  payment  of these  more  costly brand  name  drugs  by means  of a 
prior  authorization  program.  It would  seem,  therefore,  that  OBRA  93 provides  a 
statutory  basis  for  a program  similar  to that  recommended  in the  report,  i.e. a 
program  which  rest&ted  coverage  to only certain  drugs when  there  is a range  of 
available  therapeutically  equivalent  (genetic)  alternatives,  but  paid  for brand 
name  drug  products  via the prior  authorization  process. 
We do not  believe  that  Congress  would  favorably  view legislation  that would 
prohibit  payment  for brand  name  drugs when  determined  to be medically 
necessary  by physicians.  A Federal  Government  proposal  to completely 
eliminate  the  physician  override  would  be seen  as unwarranted  interference  with 
the  relationship  between  doctor  and patient  and  between  doctor  and pharmacist. 
Specifically,  physicians  would  not willingly accept  such legislation  because  it 
would  interfere  with their  ability  to prescribe  brand  name  drugs  for patients  who 
are  unable  to tolerate  specific  excipients  or binders  as found  in equivalent 
drugs.  Similarly,  patient  access  to medically  necessary  drugs  might  be hindered 
if reimbursement  was limited  in the manner  proposed.  Although  intolerance  to 
specific  pharmaceutical  ingredients  generally  is rare,  it limits  drug substitution 
options  for  the  segment  of the population  affected  by this medical  condition. 
Finally,  HCFA  is currently  prohibited  from  revising  its regulations  to change  its 
physician  certification  exemption  or drug reimbursement  methodology  to achieve 
Medicaid  program  savings.  Section  1927(e)(l)(B)  of the  Social  Security  Act 
prohibits  the  Secretary  from  modifying  the  regulatory  Federal  upper  limit 
formula  through  December  31.  Thus,  at least  until  the  end  of this calendar  year, 
we are  precluded  from  revising  the  policy which  establishes  FFP  for  certain 
brand  name  drugs,  and which permits  an exemption  from  the  Federal  upper 
limits when  there  is a physician  certification.  The  OBRA  90 moratorium  on 
changes  to  Medicaid  reimbursement  methodology  expires  as of December  31. 
After  this date,  States  may request  approval  of changes  that  would  have  the 
effect  of lowering  payment  rates  for any prescription  drugs.  This  further  reduces 
the  need  for  legislative  changes.  REFERENCES 
Romaine  Pierson  Publishers,  Inc.  April  1992.  Whar Are  Plzar-mrcistsD  ispeming 
Most OJCJZ:)  Pharmacy  Times. 
Hearst  Corporation.  February  1992.  Tlze Top 200.  American  Druggist. 
Medical  Economics  Data.  1991  Red Book.