TABLE OF CONTENTS

EXECUTIVE SUMMARY

INTRODUCTION |... 0000s 1
FINDINGS 2.00... eee e eens 3
@ Steps Taken to Strengthen the System ......- 1.22 ee eee cece eee eee eee 3
e@ Incomplete Drug List. 2.0... eee te eee eens 4
@ Improvements Underway .. 2.0... 6. ce cece eee eee ener eee 4

CONCLUSION 22... eee e eens 6


fa

Additionally, the HCFA has notified 48 specific manufacturers or distributors about
the products that the FDA determined were LTE/IRS. In the notification, HCFA also
advised manufacturers of the civil monetary penalty implications if they knowingly
provide false information to the FDA. At the time of our review, HCFA was also in
the process of notifying the other manufacturers or distributors that did not report
their drugs.

The FDA is taking steps beyond what was required in the interagency agreement to
strengthen the identification of LTE/IRS drugs. First, the FDA will analyze, on a
semi-annual basis, their list of unapproved drugs and forward information to HCFA on
LTE/IRS drugs identified. The FDA has also received drug product information from
a private company specializing in pharmaceutical database information. This private
company has agreed to periodically forward any drugs suspected to be LTE/IRS to the
FDA. The FDA will check this information as well as determine if manufacturers are
reporting the correct codes to HCFA. Findings will be shared with HCFA.

The HCFA has also developed an edit check to monitor reimbursement for LTE/IRS
drugs. This edit check will print out an exception list for reimbursed drugs that
appear on HCFA’s drug list. The exception list will be shared with the appropriate
State Agencies that showed the utilization. The HCFA is in the process of notifying
all State Medicaid Directors, through a Medicaid Drug Rebate Program Release, that
this mechanism was effective for the State utilization data received on or after March
8, 1994. The notification also reminds the States that federal financial participation
funds are not available when LTE/IRS drugs are purchased by State Medicaid
agencies.


Related Work by the Office of Inspector General (OIG)

Two prior reviews in this area, done in 1985 and 1990, identified significant problems.
In 1985, (ACN-03-60202, Enforcement of Regulations Prohibiting Medicaid Payments
for Less-Than-Effective Drugs) we found that States were dispensing and charging
Medicaid for LTE drugs. We recommended that HCFA work with FDA to provide
the States with a complete list of LTE drugs to use in screening claims.

Our 1990 follow-up review (CIN-03-89-00220, Enforcement of Regulations Prohibiting
Medicaid Payments for Less-Than-Effective Drugs) revealed that HCFA’s internal
controls to prevent Medicaid reimbursement for LTE/IRS drugs were still inadequate.

In view of the continuing problems identified in the prior reviews, we decided to
determine if procedures and controls had been improved.

METHODOLOGY AND SCOPE

Between September 1993 and July 1994, we interviewed officials from HCFA, FDA,
and a private company which provides a computerized drug database to over 40 State
Medicaid programs. We reviewed HCFA and FDA policies, procedures, and related
documents. We also compared HCFA’s most current listing of LTE/IRS drugs with a
listing of possible LTE/IRS drugs on the market as of November 23, 1993, provided by
the private company. The FDA reviewed any discrepancies to determine if the drugs
were properly identified.

We identified drugs by their National Drug Codes (NDCs). Throughout this report,
we refer to the number of drugs which are LTE/IRS, as represented by NDC codes.

This report focuses on the current process for identifying these drugs and
disseminating such information to the States. We did not attempt to quantify Federal
reimbursement to State agencies for these drugs.

N


INTRODUCTION

PURPOSE

To determine whether the Health Care Financing Administration is accurately
identifying less-than-effective drugs and sharing this information with Medicaid State
agencies on a timely basis. This is a follow-up to prior Office of Inspector General
(OIG) reviews on the same subject.

BACKGROUND

Prior to 1962, there was no Federal requirement that drugs sold in the United States
be effective. The Federal Food, Drug and Cosmetic Act required only that drugs be
tested and proven safe prior to marketing. In 1962, Congress amended the Act to
require that drugs not only be safe but also effective for their labeled indications.

Since 1962, the Food and Drug Administration (FDA) has been responsible for
identifying ineffective drugs and removing them from the market. Less-than-effective,
or LTE, drugs, are those that lack substantial evidence of effectiveness for all labeled
indications and for which the Secretary has not determined there is a compelling
justification for their medical need. When FDA identifies an LTE drug, it publishes a
proposal to withdraw the drug in the Federal Register under a Notice of Opportunity
for Hearing.

Prescription drugs are an optional service under the Medicaid program, one which all
States currently cover. Medicaid is administered by the Health Care Financing
Administration (HCFA), which reimburses States for prescriptions drugs provided to
Medicaid recipients. Manufacturers must report their prescription drugs to HCFA for
reimbursement by Medicaid.

Medicaid reimbursement for LTE drugs has been prohibited since October 1, 1982
(Social Security Act, Section 1903 (1)(5) and Medicaid regulations 42 CFR 441.25).
The prohibition includes all drugs for which hearing notices have been published in
the Federal Register, whether before or after October 1, 1982, as well as drugs the
FDA determines to be identical, related, or similar (known as IRS drugs) to an LTE
drug.

From 1982 through 1992, States were responsible for identifying LTE/IRS drugs and
removing them from their lists of approved drugs. Effective January 1, 1993, the
responsibility for identifying these drugs shifted from the State agencies to HCFA.
The HCFA relies primarily on drug manufacturers to provide them with the
appropriate information. Once the manufacturers identify the drug as LTE/IRS,
HCFA asks the FDA to verify this.


In another Program Release, HCFA notified State agencies that they will receive a
quarterly pricing file with updated LTE/IRS drug information. The HCFA further
advised States that they will be held accountable for using HCFA’s drug information
to identify LTE/IRS drugs. :

DESPITE THESE EFFORTS, HCFA’S LIST OF LTE/IRS DRUGS WAS NOT
COMPLETE.

The list of drugs which HCFA supplied to States did not contain 243 LTE/IRS drugs
currently on the market. This occurred because of HCFA’s primary reliance on the
manufacturers to self-report drug product information.

We identified these drugs by first comparing a private company’s list of all possible
LTE/IRS drugs to the HCFA list.! We then provided the results of this comparison
to FDA for their review. The FDA verified that 243 drugs from the private list were
LTE/IRS and needed to be added to HCFA’s list of drugs.

Of the 243 drugs, 161 had not been reported to HCFA as being LTE/IRS. The
remaining eighty-two were not reported to HCFA at all. The 243 drugs were
manufactured or distributed by 70 firms. Of the 70 firms, 44 had not reported their
products as LTE/IRS to HCFA. Seventeen firms had not reported their products to
HCFA at all. Nine firms had products that were both reported incorrectly or not
reported to HCFA at all.

IMPROVEMENTS ARE UNDERWAY TO CORRECT THE PROBLEMS
IDENTIFIED IN OUR CURRENT REVIEW.

Both HCFA and FDA have moved quickly to correct the problems identified in our
current review. These steps will improve the quality and completeness of the
information given to the State agencies and improve HCFA’s ability to identify claims
involving LTE/IRS drugs.

The HCFA notified all manufacturers, in its June 29, 1994 Medicaid Drug Rebate
Release, that over 200 drugs had been incorrectly identified as effective drugs. They
informed the manufacturers tliat they were changing these drugs designation to
LTE/IRS and were notifying each individual manufacturer or labeler. The HCFA
urged the firms to ensure that the information reported to HCFA is complete and
accurate and stressed that manufacturers are responsible for knowing the status of
LTE/IRS drugs. Finally, HCFA pointed out that the OIG will initiate on-site audits of
drug labelers and that the OIG has the authority to impose Civil Monetary Penalties
for each item of false information that was knowingly provided to HCFA.

' At the time of the comparison, HCFA’s list contained 934 LTE/IRS drugs.


Department of Health and Human Services

OFFICE OF
INSPECTOR GENERAL

MEDICAID PAYMENTS FOR
LESS-THAN-EFFECTIVE DRUGS

Hees,
: 4) JUNE GIBBS BROWN
Z 4 Inspector General

“ne AUGUST 1994
reea OEI-03-94-00090



OFFICE OF INSPECTOR GENERAL

The mission of the Office of Inspector General (OIG), as mandated by Public Law 95-
452, as amended, is to protect the integrity of the Department of Health and Human
Services’ (HHS) programs as well as the health and welfare of beneficiaries served

by those programs. This statutory mission is carried out through a nationwide
network of audits, investigations, and inspections conducted by three OIG operating
components: the Office of Audit Services, the Office of Investigations, and the

Office of Evaluation and Inspections. The OIG also informs the Secretary of HHS of
program and management problems and recommends courses to correct them.

OFFICE OF AUDIT SERVICES

The OIG’s Office of Audit Services (OAS) provides all auditing services for HHS,
either by conducting audits with its own audit resources or by overseeing audit work
done by others. Audits examine the performance of HHS programs and/or its: grantees
and contractors in carrying out their Tespective responsibilities and are intended

to provide independent assessments of HHS programs and operations in order to reduce

waste, abuse, and mismanagement and to promote economy and efficiency throughout the
Department.

OFFICE OF INVESTIGATIONS

The OIG’s Office of Investigations (OI) conducts criminal, civil, and

administrative investigations of allegations of wrongdoing in HHS programs or to HHS
beneficiaries and of unjust enrichment by providers. The investigative efforts of

OI lead to criminal convictions, administrative sanctions, or civil money

penalties. The OI also oversees State Medicaid fraud control units which

investigate and prosecute fraud and patient abuse in the Medicaid program.

OFFICE OF EVALUATION AND INSPECTIONS

The OIG’s Office of Evaluation and Inspections (OEI) conducts short-term management
and program evaluations (called inspections) that focus on issues of concern to the
Department, the Congress, and the public. ‘The findings and recommendations
contained in these inspection reports generate rapid, accurate, and up-to-date
information on the efficiency, vulnerability, and effectiveness of departmental

programs.

This report was prepared in the Philadelphia regional office under the direction of
Joy Quill, Regional Inspector General, Robert A. Vito, Deputy Regional Inspector
General and Thomas Robertson, Regional Inspector General for Audit Services.
Principal project staff:

OFFICE OF AUDIT SERVICES HEADQUARTERS
David Graf, Auditor Hugh Hetzer
Leon Skros, Audit Manager M. Ben Jackson


CONCLUSION

The HCFA, with help from the FDA, has significantly improved the system for
identifying and disseminating information on LTE/IRS drugs. When the improvements
underway are totally implemented, the system will

> adequately ensure that the LTE/IRS drugs are properly identified;

> provide State agencies with a complete up-to-date compendium of such
drugs; and
> alert HCFA to any States which are purchasing these drugs.

We are pleased that HCFA and FDA have taken such prompt action to correct the
problems identified in our review.


FINDINGS

THE HCFA AND FDA HAVE TAKEN SIGNIFICANT STEPS TO STRENGTHEN
THE SYSTEM FOR IDENTIFYING LTE/IRS DRUGS AND CONVEYING
NEEDED INFORMATION TO THE STATES.

The HCFA has assumed responsibility for identifying LTE/IRS drugs and
disseminating information to the States. The system now in use is a significant
improvement over the system employed in the OIG’s previous review. Previously,
each Medicaid State Agency made their own determination.

The HCFA has strengthened its system for identifying LTE/IRS drugs through an intra-
agency agreement with the FDA.

Under terms of this agreement, FDA assists HCFA in determining if drugs are LTE
or IRS. The specific provisions of the agreement are as follows:

1) The FDA sends HCFA a copy of any Notice of Opportunity for Hearing
concerning an LTE drug, including a listing of all applicable IRS drugs within 5
days after publication in the Federal Register,

2) Every quarter, HCFA provides FDA with a list of all IRS drugs identified by the
manufacturer which are not on FDA’s most recent listing,

3) Every quarter, FDA provides HCFA with an updated list of LTE drugs,
4) The FDA informs HCFA of any significant actions taken on the drugs, and

5) The FDA provides HCFA with a listing of all drugs determined to be LTE/IRS
drugs.
The HCFA conveys LTE/IRS drug information to manufacturers and State agencies

through Medicaid Drug Rebate Program Releases and Quarterly Pricing Data.

The HCFA informs drug manufacturers and State agencies of their responsibilities and
of impending changes regarding LTE/IRS drugs through Medicaid Drug Rebate
Program Releases and Quarterly Pricing Data. From December 26, 1991 to June 29,
1994, HCFA had issued eleven notifications relating to such drugs.

One such Program Release notified manufacturers that they are required to include
LTE/IRS drugs in quarterly reports to HCFA, using HCFA’s codes established for this
purpose. The Medicaid Drug Rebate Program requires drug manufacturers to submit
quarterly reports to HCFA on Medicaid utilization of their drugs.


e

Despite these efforts, HCFA’s list of LTE/IRS drugs was not complete.

The HCFA’s list, recently supplied to Medicaid State agencies, should have included
an additional 243 drugs. We identified these drugs by comparing a private database
company’s list of LTE/IRS drugs with the current HCFA list. The FDA made the
determination that the 243 drugs were LTE/IRS and should be included on HCFA’s
list. The omission occurred because HCFA primarily relies on the manufacturers to
self-report drug product information.

Improvements are underway to correct the problems identified in our current review.

The HCFA is in the process of adding the drugs we identified to the list of LTE/IRS
drugs, and has notified or is in the process of notifying all the affected drug
manufacturers, advising them of the civil monetary penalty implications if they
knowingly provide false information. The FDA is taking steps beyond what was
required in the intra-agency agreement to identify LTE/IRS drugs and forward future
LTE/IRS drug determinations to HCFA, including information on the accuracy of
reporting by drug manufacturers.

The HCFA has also developed an edit check to monitor reimbursement for LTE/IRS
drugs. At the time of our review the edit check was in place and HCFA was in the
process of notifying all State Medicaid Directors of the edit check through a Medicaid
Drug Rebate Program Release.

CONCLUSION

The HCFA, with help from the FDA, has significantly improved the system for
identifying and disseminating information on LTE/IRS drugs. When the improvements
underway are totally implemented, the system will:

» adequately ensure that LTE/IRS drugs are properly identified;

> provide State agencies with a complete up-to-date compendium of such
drugs; and
» alert HCFA to any State which is purchasing these drugs.

We are pleased that HCFA and FDA have taken such prompt action to correct the
problems identified in our review.


EXECUTIVE SUMMARY

PURPOSE

To determine whether the Health Care Financing Administration (HCFA) is
accurately identifying less-than-effective (LTE) drugs and sharing this information with
Medicaid State agencies on a timely basis. This is a follow-up to prior Office of
Inspector General (OIG) reviews on the same subject.

BACKGROUND

Since 1962, the Federal Food, Drug and Cosmetic Act has required that drugs be both
safe and effective for their labeled indications. The Food and Drug Administration
(FDA) is responsible for identifying LTE drugs and ensuring their withdrawal from the
market.

Prescription drugs are covered under the Medicaid program, which is administered by
the HCFA. As of October 1, 1982, Medicaid reimbursement was prohibited for LTE
drugs, as well as for drugs designated by FDA as "identical, related, or similar" (known
as IRS drugs) to LTE drugs. States were responsible for identifying LTE/IRS drugs
and removing them from their lists of approved drugs.

In a 1985 review, the OIG found that States were dispensing and charging Medicaid
for LTE drugs. We recommended that HCFA work with FDA to provide the States
with a complete list of LTE drugs to use in screening claims. A follow-up review in
1990 revealed that HCFA’s internal controls to prevent Medicaid reimbursement for
LTE drugs were inadequate. We also found that HCFA and FDA did not have a
system to routinely identify and maintain a list of all LTE drugs.

On January 1, 1993, the responsibility for identifying LTE/IRS drugs shifted from the
State agencies to HCFA. Since that time, HCFA has relied primarily on drug

manufacturers to supply them with this information.
FINDINGS

The HCFA and FDA have taken significant steps to strengthen the system for identifying
LTE and IRS drugs and conveying needed information to States.

Through an interagency agreement, HCFA and FDA currently engage in a regular
exchange of LTE/IRS data. The HCFA provides up-to-date information to
manufacturers and States through periodic Medicaid Drug Rebate Program Releases
and Quarterly Pricing data.


Department of Health and Human Services

OFFICE OF
INSPECTOR GENERAL

MEDICAID PAYMENTS FOR
LESS-THAN-EFFECTIVE DRUGS

2 J) JUNE GIBBS BROWN
z 7 Inspector General

“ae AUGUST 1994
“aaa OEI-03-94-00090