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. 

OEI’s 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. 

Florida’s 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 Administration’s 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 highpriced generic drugs have on reimbursement. Medicare’s 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 highpriced 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 HCFA’s continued efforts to provide guidance to States in implementing costsavings 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 

EXECUTIVE SUMMARY ................. . . ...... 

INTRODUCTION ........................ . . ...... 

FINDINGS.. ............................ ...... 

l Medicare savings for four drugs ............ ...... 

l Florida Medicaid savings for eight drugs ...... ...... 

RECOMMENDATIONS .................. ...... 

APPENDICES 

A: Impact of High-Priced Generic Drugs on Medicare ...... 

B: Impact of High-Priced Generic Drugs on Medicaid ...... 

C: Health Care Financing Administration Comments . . . . . 

...... . 

...... 

...... . 

...... 

...... 

...... 

...... 

...... 

. . . . . . . 

PAGE 

........... i 

........... 1 

........... 6 

........... 6 

........... 7 

........... 9 

......... A-l 

......... B-l 

......... 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 Medicaid’s 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 HCFA’s National Claims History (NCH) File. We collected 

drug rebate data from HCFA’s 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 code’s 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 “not3 
-- 

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 Florida’s 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 Medicare’s allowance was based only on lower-priced generics. The fourth drug’s 

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 drug’s 

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. 

FLORIDA’S 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. Florida’s drug reimbursement accounts for about 5 

percent of the Medicaid program’s 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 Florida’s 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 Administration’s 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 highpriced generic drugs have on reimbursement. Medicare’s 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 highpriced 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 HCFA’s continued efforts to provide guidance to States in implementing costsavings 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 

Dms 

Name 

Vancocin 

Vancocin 

Vancocin 

Vancocin 

Lycophin 

Vancoled 

Vancomycin 

II Vancomvcin 

/IVancomvcin 

I 

1 

I 

1 

BRAND 

NIX 

Code 

00002-7297-O 1 

00002-7297- 10 

00002-1444-01 

00002- 1444-25 

GENERIC 

00469-2210-30 

00205-3 154-88 

00074-6534-01 

00074-4332-01 

003 64-2472-3 3 

Red Book 

AWP 

$8.28 

$8.28 

$7.80 

$7.80 

I 

1 $10.97 I 

$5.76 

$12.48 

1 $34.66 11 

I 

Code J1840: Injection, 

Florida Medicare 

Dws 

Name 

1~Kantrex 

Kanamycin 

Sulfate 

Kanamycin 

Sulfate 

Kanamycin Sulfate, up to 500 mg 

Allowable as of l/1/97 - $6.69 

BRAND 

NDC 

Code 

00015-3502-20 

GENERIC 

00686-0064-02 

39769-0064-02 

Red Book 

AWP 

I 

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 

/IEtoposide I 00186-1571-31 I $38.75 11 

A-2 
APPENDIX B 

Impact of High-Priced Generic Drugs on Medicaid 

r 

NDC 

Code 

00002-1444-01 

00002- 1444-25 

00002-7297-O 1 

00002-7297- 10 

00469-22 1O-30 

00205-3 154-88 

00074-4332-o 1 

00074-6534-o 1 

00364-2472-33 

Vancomycin, 500 mg -1 

BRAND 

units Reimbursement 

Reimbursed per Unit 

1,953 $6.68 

0 N/A 

0 N/A 

450 $7.12 

GENERIC 

220 $7.49 

918 $4.62 

2,400 $26.40 

Reimbursement 

with Rebate 

$2.70 

N/A 

N/A 

$3.04 

$7.12 

$3.46 

$26.07 

551 $10.20 1 $9.81 /I 

422 $6.36 $6.33 

B-l 
Vancomycin, 2 gm 

Reimbursement Reimbursement 

$19.05 

$8.11 

$12.38 

$13.19 

Reimbursement 

with Rebate t 

$61.68 

00074-653 5-O 1 747 

00205-3 154-15 2,147 

00364-2473-9 1 1,290 

00469-2840-40 1,293 

Pentamidine, 

BRAND 

$19.81 

$9.27 

$12.40 

$13.91 

300 mg 

NDC Code Units Reimbursement 

Reimbursed per Unit 

00469-0113-10 232 $84.24 

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 

NDC Code 

00002-7 194-O 1 

00013-7456-86 

00002-7198-01 

00002-7 198-09 

54868-3 196-00 

BRAND 

Units Reimbursement 

Reimbursed per Unit 

208 

113 

0 

0 

GENERIC 

0 

51 

$29.63 

$30.93 

N/A 

N/A 

N/A 

$31.59 

Reimbursement 

with Rebate 

$6.38 

$29.96 

N/A 

N/A 

N/A 

$31.11 

Reimbursement 

with Rebate 

$7.09 ~ 

N/A 

N/A 

$22.09 

N/A 

N/A 

$22.05 

N/A 

N/A 

N/A 

61703-0309-06 

NDC Code 

00015-3095-20 

00015-3095-30 

53905-0291-01 

00013-7336-91 

00186-1571-3 

00364-3028-53 

00703-5643-01 

00703-5653-01 

55390-0291-01 

58406-0711-12 

Etoposide, 5 ml 

BRAND 

U&S Reimbursement 

Reimbursed per Unit 

1,167 $23.36 

0 N/A 

GENERIC 

0 N/A 

1,320 $23.37 

1 0 N/A 

0 N/A 

793 $22.50 

0 N/A 

0 N/A 

0 N/A 

B-3 
BRAND 

NDC Code Units Reimbursement Reimbursement 

Reimbursed per Unit with Rebate 

II000 15-3020-20 I 

00074-1956-01 

00074-1958-01 

00641-0123-23 

00703-9032-03 

00024-0016-l 

00186-1703-13 

GENERIC 

47 $45.94 $45.18 

90 $51.60 $50.76 

4,102 $27.27 $24.53 

2,474 $27.82 $27.60 

1 0 N/A N/A 

39769-023 7-02 

553 90-0226-02 

61703-0201-07 

6 1703-0202-07 

0 N/A N/A 

7 $30.82 $30.81 

189 $18.71 $18.28 

298 $15.78 $15.33 

176 $24.20 $23.66 

B-4 
Clindamycin Phosphate, 4 ml 

BRAND 

NDC Code units Reimbursement 

Reimbursed per Unit 

00009-0775-26 336 $2.93 

B-5 

Reimbursement 

with Rebate 

$2.47 
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 Repark“The impactof High 

PricedGeneri~~Drugson 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 

Medicareprovidesreimbmsementfor 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 

determinedreimbursementbasedon themedianof all AWPsfor thegenericdrugs. Due 

to legislationrecentlyenactedby Congress,MedicarePartB wiiI beginto reimburse 

covereddrugsat 95 percentof the averagewholesalepriceon January1,1998. 

T’hiskupectionreportresultedfrom a Congressionalrequestconcerninghigh-priced 

gene& dIugs. our detailedcDmmentsareasfollows: 

OIG Recommendation 1 

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

in~rnediancalculationtodefcrmineM~~allowancgorproposelimitedMedicare 

auowancesto brandpriceswhenbigher-pricedgenericdrugsareinvolved~ 

We concurwith the draft report’s recommendationsfor Medicare,andwill considerthis 

proposalin regulationsimpkmentingprovisionsof theBalancedBudgetAct of 1997. 

c-2 
OIG Recommendation 2 

TheHealthCareFinancingAdministrationshouldlimit Medicaidreimbursementof 

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 MedicaidreimbursementbutbelieveStatesarein 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 

addressestheproblemwith a minimalamountof Federalinterventioninto existingState 

opemtionsiIlthisarea 

Furthermore,HCFA is undertak& a morecomprehensivereviewof drugpricesandhow 

theyaflkct theMedicaidprogram andwill issue* guidanceto thestateson this as 

apprOpriate. 

c-3