CHART 2

aera RA AL

U.S. vs. EUROPFAN ECONOMIC COMMUNITY PRESCRIPTION DRUG PRICES
(25 Identical Drug Products, 1988)

index

USA

RN ANAT

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VL
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AUR

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SSS EEC average = 100

ININNll

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t

Gre Spa Por Fra Ita Bel UK. Ire Den Ger Net

350 7

300 +

250 7

200 ~

150 +

100 “iE
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0



COMMENTS

The HCFA agrees that the Medicaid program should pay less for prescription drugs and notes
that OBRA ’90 contains provisions that partially support our recommendations. The two
provisions that tie into our recommendations are Set specific drug price limits similar to those in
place for multiple source drugs and Negotiate with drug manufacturers for discount and rebates."

It should be noted that OBRA ’90 included provisions that involve the HCFA in gathering and
monitoring drug price data and negotiating rebate agreements with drug manufacurers on behalf
of the States. The Congressional Budget Office estimated total savings to be $3.3 billion over 5
years.

We note that HCFA does not comment on our recommendation for the creation of restrictive
drug lists. We believe that this recommendation should be pursued further by the HCFA as it
could lead to annual savings of at least $226 million by itself.



TABLE 2
BRAND-NAME DRUGS: MEDICAID COST COMPARISON

A B c o E F G H 1 J kK
AVERAGE ANNUAL
CANADIAN KUMBER OF = AVERAGE COST STANDARDIZED CANADIAN YEARLY SAVINGS

Rx PER NUMBER PER cost AVERAGE COST EXPENDITURE (CCRT )"E*12)

WUMBER
DOSAGE DISPENSED STATE DISPENSED RX ((C/F)*G) «IN U.S. $ (E*G*12) *E/C)

THEO-DUR 200 NG 100 CA $497,211
. 100 MI $1,566
100 WY $111,904
400 OH $58,760
100 PA 364,703
TRENTAL 400 MG 60 CA (392,676)
60 OMI ($376,015)
60 ONY ($555,488)
60 CH $1,336,143 ($326,879)
60 PA $1,430,669 ($268,462)
VASOTEC 5 MG 100 «CA $4,385,220 $121,504
100 MI $684,843 $101,432
100 = NY $1,454,367 $185,857
100 OH $766,176 367,547
100 PA $1,370,726 $267,786
ZANTAC 150 MG 60 CA $257,306 $88,711
60 MI $6,225,533 $1,681,111
60 NY $23,911,891 $7,101,467
60 «OH $10,741,743 $3,442,578
60 PA $10,848,240 $2,913,461

$142,093 ,505 $46,535, 123

DATA SOURCES

1 = FORMULARIES FOR PROVINCES OF ONTARIO & QUEBEC; PRICES AVERAGED
F,G - MARKET MEASURES, INC., WEST ORANGE, NJ, MEDICAID DRUG UTILIZATION REPORT, JULY 1990


of savings, and noted that OBRA ’90 contains provisions that partially support the OIG
recommendations.

The HCFA did not respond to our recommendation regarding the creation of restrictive drug
lists. We believe that this recommendation should be pursued as it could lead to annual savings
of at least $226 million.




TABLE 2
BRAND-NAME DRUGS: MEDICAID COST COMPARISON

A B c D E F G Ly 1 J Kx
AVERAGE ANNUAL
CANADIAN NUMBER OF AVERAGE COST STANDARDIZED CANADIAN YEARLY ‘SAVINGS
NUMBER Rx PER NUMBER PER cost AVERAGE COST EXPENDITURE  ((CH-E)*E*12)
DRUG DOSAGE DISPENSED STATE MONTH DISPENSED Rx ((C/F)*G) IN US. S (E*G*12) *F/C)
CARDIZEM 30 MG 100 CA 10,393 103 $33.07 $32.11 $26.34 $4, 124,358 $761,156
“ 100 HI 1329 90 $26.54 $29.49 $741,740 $79,277
100 NY 6,346 9 = $27.75 $29.21 $2,113,218 $207,876
100 OH 2,651 92 $28.48 $30.96 $899,174 $134,176
100 PA - 3,649 88 $28.37 $32.24 $1,262,266 $227,405
CECLOR 250 MG 15° CA 7,931 35 $46.53 $19.96 $4,428,353 $1,869,113
15 MI 3,004 28 © $37.20 $19.95 31,340,986 3565 ,501
15 NY 9,311 26 © $33.65 $19.41 $3,759,782 $1,527,831
15° OH 4,665 25.. $35.57 $21.34 $1,905,841 $876,696
15 PA 4,030 27 $39.16 $21.76 $11.52 $1,893,778 $890,586
CLINORIL 150 MG 400 CA 1,975 65 ($46.76 $71.94 $42.29 $1,108,212 $456,669
100 HI 626 54 $40.46 $76.93 $42.29 $303,936 $132,370
100 KY 3,064 46 $33.48 $72.78 $42.29 $1,229,787 $515, 153
100 ok 1,006 54 $38.41 $71.13 $42.29 $463 685 $187,974
100 PA 1,039 51 $43.48 $85.25 $42.29 $542,109 $273,173
CORGARD 40 MG 100 CA 733 65 $40.95 $63.00 $32.44 $360,196 $176,708
100 HI 464 340 $21.34 $62.76 $32.66 $118,821 $57,403
100 WY 2,007 35 $19.90 $56.86 $32.46 $479,272 $205,798
100 OH 573 360 $21.17 $58.81 $32.46 $145,565 $65,257
100 PA 600 39 $27.27 $69.92 $32.44 $196,344 $105,245,
DIABETA 5 MG 30 CA 6,586 98 $37.75 $11.56 $4.11 $2,982,552 $1,922,334
30 MI 1,364 63 $20.84 $9.92 $4.11 $340,359 $199,470
30 NY 3,533 65 $20.08 $9.27 $4.11 $851,312 $473,969
30 OH 2,631 67 $23.20 $10.39 $4.11 $732,470 $442,820
30 PA 2,011 66 $25.29 $11.50 $444 $610,298 $392,209
DILANTIN 100 MG 100 CA 15,011 114 $12.63 $11.08 $4.20 $2,275,067 $1,413,561
100 HI 8,184 91 $14.30 $12.42 $4.20 $1,109,344 $734,550
100 WY 10,871 - 9 $9.74 $10.22 $4.20 $4,266,689 $766,768
100 OK 9,385 93 $12.66 $13.61 $4.20 $4,425,769 $986,368
100 PA 10,842 93 $11.55 $12.42 $4.20 $1,502,701 $995 ,084
HALCION .25 MG 100 CA 13,526 15 $9.16 $61.07 $14.61 $1,486,558 $1, 130,836
100 MI 2,571 28 © $14.05 $50.18 $14.61 $433,471 $307,237
100 AY 6,739 28 «$12.51 $44.68 $14.61 $1,011,659 $680,781
100 OH 4,015 27 $12.83 $467.52 $14.61 $618,149 $428,058
100 PA 4,320 30 © $15.28 $50.93 $14.61 $792,115 $564,857
LANOXIN -25 MG 100 CA 12,126 77 $7.86 $10.21 $6.50 $1,143,726 $415,785
100 MI 5,340 30 $4.56 $15.20 $6.50 $292,205 $167,309
100 WY 9,395 3 $4.68 $13.76 $6.50 $527,623 $278,587
100 OH 6,749 32 $4.89 $15.28 $6.50 $396,031 $227,657
100 PA 6,531 35 $4.34 $12.40 $6.50 $340, 134 $161,926
LOPID 300 MG 100 CA 485 109 $39.51 $36.25 $34.10 $229,948 $13,629
100 HI 721 88 $33.25 $37.78 $34.10 $287,679 $28,055
100 WY 3,015 89 $33.21 $37.31 $34.10 $1,201,538 $103,535
100 OH 833 84 $32.87 $39.13 $34.10 $328,569 $42,269
100 PA 742 73 $32.61 $41.81 $34.10 $290,359 $53,536
LOPRESSOR 100 MG 100 CA 2,930 73 $43.84 $60.05 $30.62 $1,541,414 $755,394
100 MI 685 47 $25.85 $55.00 $30.62 $212,487 $94,176
100 WY 2,971 49 $26.23 $53.53 $30.62 $935,152 $400, 167
100 Ox 653 51 $28.98 $56.82 $30.62 $227,087 $106,703
100 PA 875 52 $31.48 $60.54 $30.62 $330,540 $163,333
ORTHO NOVUM 7-7-7 28 CA 8,803 86 $50.08 $16.31 $7.78 $5,290,251 $2,765,049
28 ME 6,810 28 $17.26 $17.26 $7.78 $1,410,487 $774,465
28 ONY 6,288 28 $21.57 $21.57 $7.78 $1,627,586 $1, 040,316
28 OK 6,467 31 $18.00 $16.26 $7.78 $1,396,872 $728,172
28 PA 3,970 33 $20.20 $17.16 $7.78 $962,328 $525,338
TEGRETOL 200 MG 100 CA 2,767 47 $22.78 $15.50 $19.61 $756,387
100 I 3,055 126 $32.41 $25.72 $19.61 $1,188,154
100 RY 3,489 125 $35.29 $28.23 $19.61 $1,477,522
100 OH 3,753 113 $32.99 $29.19 $19.61 $1,485,738
100 PA 3,804 119 $37.06 $31.14 $19.61 $1,691,715
TENORMIN 100 KG 100 CA 4,461 62 $59.44 $95.87 $70.68 $1,042,102
100 WI 540 31 $28.39 $91.58 $70.68 $183,967
100 NY 1,909 3% $27.73 $81.56 $70.68 $635,239
100 OK 600 35 $33.24 $94.97 $70.68 $239,328

100 PA 644 37 $37.14 $100.38 $70.68 $287,018


Page 2

We believe this approach can be effective. Drug manufacturers have already
begun on their own to negotiate price deals with various State Medicaid
programs. HCFA actuarial cost estimates of the drug provisions of the recently
passed reconciliation bill cause us to agree that a $474 million reduction

($261 million reduction in Federal financial participation) for Medicaid
prescription drug costs is achievable.

We believe any further proposals to address prescription drugs must be
considered with a view toward seeking to balance cost savings with appropriate
Federal/State roles, access to medically necessary drugs for Medicaid recipients,
adequaté payment for pharmacists’ services, and protection of the
physician/patient relationship.

General comments

° The enormous differences between U.S. and Canadian systems for the
purchase of prescription drugs for our respective government health
programs preclude the use of Canadian comparisons as a basis for US.
drug savings estimates. Canada has a national health insurance program
which allows the Canadian government to buy drugs directly from the
manufacturer and negotiate prices for those drugs. Further, the Canadian
government has the authority to determine whether or not a drug will be
marketed in Canada and at what price. Certain negotiating tools used by
the Canadians would require legislation and might face strong opposition
in this country. Such negotiating tools include: (1) tieing the "license to
market" for new drugs to a negotiated price settlement between the
Federal government and manufacturers and; (2) the ability of Canada’s
Patent Medicine Review Board to remove patent protection for drugs
whose prices increase with little justification.

fo) An unknown amount of the Canadian savings were obtained because
“Canada was benefitting from research and development of drugs in the
USS. but was not compensating manufacturers for these costs within the
price structure established in Canada." We believe that R&D costs ought
to be fairly compensated as a part of payment, therefore, "compensating
manufacturers for these costs” would somewhat limit the savings that
could be achieved in the U.S. if additional legislation is passed.


FINDINGS

Almost All Brand Name Prescription Drugs Are Considerably More Expensive In The U.S.
Than In Other Industrialized Nations

For the 48 individual drugs analyzed (see appendices, Table 1) the U.S. Blue Book prices were
on the average 62 percent higher (from a low of 6.65 to a high of 233.18 percent) in the U.S.
than the average of the prices determined for the two provinces (Quebec and Ontario) of Canada.
Only two drugs were found to be less expensive in the U.S.: Trental (pentoxifylline) and Eryc
(erythromycin). In a report issued in 1989, the Senate Special Committee on Aging, stated that
Americans spend more for prescription drugs than the citizens of any nation (except the
Netherlands) in the European Economic Community (EEC) (see appendices, Chart 2). Average
drug prices paid by American consumers are even higher than drug prices paid in EEC nations
that do not regulate prescription drug prices, and 54 percent higher than the average for EEC
nations.

Medicaid State Agencies Paid An Estimated $474 Million More For Name Brand Drugs Than
Would Have Been Paid At The Prices Paid By Canadian Prescription Drug Programs.

The findings from the utilization data in the top five States for Medicaid drug expenditures (see
appendices, Table 2) show the estimated Medicaid savings that could accrue if the Canadian
prices were paid. On just the seventeen direct matches, with no extrapolation, annual savings
would be $46 million. If similar price differences exist on all other brand name drugs, total
Medicaid savings are estimated at $474 million per year.

Canada’s Lower Prices Were Attributable To Negotiated Price Reductions Between Drug
Manufacturers And The Provincial Government.

Our interviews with Canadian officials indicated that lower prices in Canada were attributable to
the authorities and negotiating efforts of the Provincial governments. These officials noted that
Canada ties the License to Market for new drugs in Canada to a negotiated price settlement
between the Provincial government and manufacturers. The failure to reach a price agreement
can mean the refusal to grant a license to market. Typically, manufacturers must submit price
information from seven nations. This information is used to arrive at a negotiated price
arrangement. Canadian officials indicated that they seek price reductions of at least 25 percent
below the amount paid in the U.S. for the same drug.

These officials also noted that the creation of the Patent Medicine Review board in Canada has
restrained price increases. This pricing review board ties price increases to rises in the consumer
price index. If the Board finds little justification for a price increase, it can remove the patent
protection for the drug. In determining prices this Board may compare the costs both nationally
and internationally (up to 7 countries including the U.S.) for therapeutically equivalent drugs.
Some estimate that drug prices have been reduced up to 25 percent because of actions of the
Patent Medicine Review Board.



INTRODUCTION

BACKGROUND

The decade of the 1980’s was marked by rapid escalation in spending for medical care.
Expenditures for health care in the U.S. has doubled since the beginning of this decade. Costs
and expenditures for prescription medicines are one of the fastest growing components of this
increase. According to the U.S. Bureau of Labor Statistics, the price of prescription drugs
increased 149 percent over the past decade while the general price inflation was only 53 percent.
This has occurred while drug manufacturing, as an industry, has enjoyed being one of the nations
most profitable industries. According to the U.S. Department of Commerce statistics for the
decade of the 1980’s, pretax profits for pharmaceutical manufacturing firms averaged 17.55
percent of sales compared with 6.77 percent for all manufacturing industries (see appendices,
Chart 1). -- :

Federal and State Medicaid policy makers have viewed drug price increases with great concern.
Medicaid now pays more than $3.6 billion per year for prescription drugs, an amount that
exceeds payments for physician services. Because of these high costs the Senate Special
Committee on Aging asked us to prepare this report. Many Medicaid State Agencies have
embarked on strategies to limit their drug outlays. Twenty-one States have developed restricted
drug lists to limit their outlays for certain high cost drugs. Such restricted drug lists are not
limited to Medicaid programs. A 1989 Special Committee on Aging report stated that large
hospital buying groups base their contract purchases on multi-hospital formularies. The report
also stated that HMOs are particularly successful in using a therapeutic formulary. In addition,
some States have begun to negotiate with drug manufacturers to obtain discounts or rebates on
prescription drugs. Many manufacturers have required open formularies as a condition for
receiving discounts and rebates.

This report evaluates strategies currently used by State Medicaid Agencies and Canadian
provinces in reducing their drug costs and proposes a series of actions to prevent unnecessary
payments for prescription drugs.

METHODOLOGY

This study had a three-phased approach. Phase one analyzed and compared existing data from
the U.S., Canada and the nations which comprise European Economic Community. The second
phase consisted of interviews with representatives from: (1) the Canadian government, (2)
respondents from selected trade associations in both Canada and the U.S., and (3) representatives
from selected Medicaid State Agencies. These interviews explored the components of pricing
and the perceived reasons for the price differences. In part three, we compared the Medicaid
drug expenditures of five States which maintain restricted drug lists to five States which do not
have such restrictions.



TABLE OF CONTENTS

EXECUTIVE SUMMARY

Almost All Brand Name Prescriptions Drugs Are Considerably More
Expensive In The U.S. Than In Other Industrialized Counties ...........cceseeee! 4

Medicaid State Agencies Paid An Estimated $474 Million More For
Name Brand Drugs Than Would Have Been Paid At The Prices Paid By
Canadian Prescription Drug Programs .........:.cssscssseseesesseeseceeseeeneseeseseetecteetestenee

Canada’s Lower Prices Were Attributable To Negotiated Price Reductions
Between Drug Manufacturers And The Federal Government............:ccsscceseeees 4

Success In Negotiating Price Reductions Is Dependent On An Ability
To Restrict The Payment For Certain High Cost Drugs In Cases Where
Lower Cost Alternatives Exist .........cesccsssssssssesssssneeseeesesrvecssesuecuecnecatesneeanerseens 5

The Negotiation Efforts Of State Medicaid Agencies Would Be Enhanced
Through Federal Efforts To Monitor And Provide International Drug Pricing
Information ..

The Medicaid Prescription Drug Costs Per Recipient, In 1988, Were

22 Percent Lower In The Five Largest States With Restricted Drug Lists........... 6

Implementing Restricted Drug List In The 29 Non-Restricted States

Could Result In Estimated Savings of $226 Million Per Year .........0...ss:eeseeeee 6
COMMENTS



CHART 1

SHAYNLOVANNVW TIV WOLLNADVWHVHd

6861 886L 2861 9861 S86L 861 e861 c86h L861 O86t
T T T T T T T T T T

4

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differences in the drug utilization characteristics of States due to demographic differences may
impact the reliability of our comparison concerning the effect of restrictive drug lists on
Medicaid outlays.


Department of Health and Human Services

OFFICE OF
INSPECTOR GENERAL

STRATEGIES TO REDUCE
MEDICAID DRUG EXPENDITURES

ICES.
s oy
2 Richard P. Kusserow
3 ( INSPECTOR GENERAL
=
“4

OEI-12-90-00800



The Medicaid Prescription Drug Costs Per Recipient, In 1988, Were 22 Percent Lower In The
Five Largest States With Restricted Drug Lists

We determined that the five largest States which maintain restricted drug lists (Califomia, New
York, Ohio, Illinois, and Michigan) had a Medicaid prescription drug cost per recipient of
$203.05 for 1988. The drug cost of the five largest States without restricted drug lists
(Pennsylvania, Texas, Florida, Massachusetts, and Indiana) was $247.42 per recipient. This 22
percent difference indicates that the five largest States saved $272 million in 1988 through the
maintenance of their restricted drug list.

We conducted a further analysis of the 25 States with highest total Medicaid drug payments.
These 25 States comprise 87 percent of the total 1988 Medicaid drug outlays. We found 8 of
these 25 States have drug costs of less than $200 per recipient and 7 of these 8 States maintain-a
restricted drug list. If all 21 State agencies which maintain restrictive drug lists achieved similar
savings, then the total 1988 Medicaid savings due to restrictive drug lists totals $443 million.

Implementing Restricted Drug Lists In The 29 Non-Restricted States Could Result In
Estimated Savings Of $226 Million Per Year.

We estimate that the 29 Medicaid State Agencies that do not currently maintain restrictive drug
lists would achieve annual savings of $226 million if restrictions were applied on the same basis
as the five largest States which maintain restricted drug lists.

6


We also interviewed representatives from the Pharmaceutical Manufacturers Association in the
U.S. to solicit their perspectives on the drug price controls used in Canada. These
representatives, while acknowledging the lower prices exist in Canada, stated that drug research
and Food and Drug Administration approval costs add significant costs which are reflected in
U.S. drug prices. These representatives believed that Canada was benefiting from research and
development of drugs in the U.S. but was not compensating manufacturers for these costs within
the price structure established in Canada.

Success In Negotiating Price Reductions Is Dependent On An Ability To Restrict The Payment
For Certain High Cost Drugs In Cases Where Lower Cost Alternatives Exist.

Our interviews with Canadian officials indicated that they believed that establishing restricted
drug lists was critically important in negotiating favorable drug price arrangements. As stated
earlier, at the Federal level the License to Market in Canada is withheld on new drugs until a
price settlement has been reached. At the Provincial level, the Provinces under study have
established restricted drug lists as a means to limit outlays for certain drugs. Without such
restricted drug lists, known in the U.S. as formularies, these officials believed their negotiating
power would be diminished.

The Negotiation Efforts Of State Medicaid Agencies Would Be Enhanced Through Federal
Efforts To Monitor And Provide International Drug Pricing Information.

The negotiation efforts of State Medicaid Agencies would be enhanced through Federal! efforts to
monitor and provide them with national and international drug pricing information. Our
interviews with representatives from ten large Medicaid State Agencies disclosed that 8 out of
the 10 have begun discussions with drug manufacturers aimed at obtaining discounts and rebates
on their Medicaid drug purchases. The State of California has completed negotiated price
arrangements with a drug manufacturer. Another State, Ohio, indicated that it is ready to sign
agreement with two manufacturers. We determined that there are several international data bases
that contain information on drug pricing. This information could be of great value to States in
their negotiations. The Organization for Economic Cooperation and Development (OECD) has a
Health Data File that facilitates the identification of trends in pricing and use. International
comparisons of individual drug prices are available through the Belgian Consumer Association.

Contacts were also made within the U.S. Federal Government to determine if a single entity or
organization is analyzing drug prices. We also checked to see if any governmental organization
was assessing international drug prices. We found that no Federal component was assessing
individual drug prices, comparing the differences in prices across States, examining types of
purchasing arrangements (retail or wholesale) or assessing the prices in the U.S. with Canada or
the European countries. Components within the Public Health Service do obtain and analyze the
prices paid for medications, usually on a condition specific basis. Also cumulative price
comparisons for prescribed and over the counter drugs are reported as part of the Consumer
Price Index. The HCFA has recently published in the Health Care Financing Review 1989
Supplement an international comparison of health care financing and delivery: data and
perspectives. This contains the OECD Health Data file compendium including trends in drug
pricing.



In phase one, information for the U.S. was obtained from the First Data Bank: Drug Information
Data. For the purpose of analysis the Blue Book Average Wholesale Unit Price was used as an
indicator of consumer retail prices. This is the average wholesale price (AWP) based upon actual
surveys of wholesalers. Data from the March 1989 tape were analyzed. Actual State Medicaid
utilization data were obtained for the States. This analysis, contained in Table 2 (see appendices)
was based on data obtained from Market Measures Incorporated, West Orange, New Jersey.

Information for Canada was obtained from Quebec’s List of Medications and Ontario’s Drug
Benefit Formulary. Both are dated January 1989. Quebec uses the prices as listed while
Ontario’s system is based on the best available price. This is the lowest amount, calculated per
gram, milliliter, tablet, capsule or other unit, for which a listed drug product can be purchased in
Canada for wholesale or retail sale in Ontario. For the purposes of this report the best available
price was used in calculating Ontario’s prices. All prices (Canadian and U.S.) are product prices
and do not include dispensing fees which are roughly equivalent. Prices were compared using
the name, equivalent dosage, quantity of medication and, where possible, the manufacturer.

We secured information from 10 Medicaid State Agencies with high expenditures: New York,
Illinois, Michigan, Ohio, California, Pennsylvania, Texas, Florida, Massachusetts, and Indiana.
Through our contacts with State officials, we determined which States maintained open lists. We
compared a weighted average of the drug costs per beneficiary of the five largest States with
restricted drug lists to the weighted average of the five largest States without restricted drug lists.

The Canadian prescription drug prices were calculated using the dollar conversion rate of .8324.
This was the rate on March 1, 1989.

Limitations of the Approach

Analysis of this nature has inherent difficulties. Comparisons could only be made in cases where
packaging and dosage strength were the same. We started with the 100 most frequently
prescribed drugs in the U.S. but could only find 48 direct matches with the Canadian price lists.
The timeframes for the comparison shown on Table 1 are within the first quarter of 1989. The
usage data, which we obtained for five States which account for about 42 percent of the total
Medicaid drug expenditures, was not available for the same quarter but we used the most recent
available, which ranged from 1988 for New York to March 1990 for California. For Table 2, we
were only able to match exact dosages on 17 of the 48 drugs shown on Table 1; however these
accounted for about 10 percent of total expenditures

We would also note that differences in wholesale and retail margins, method of reimbursement,
range of beneficiaries as well as cultural and demographic variation create differences in pricing
and use of prescribed medication. The difference in the two health care systems coupled with
the impact of the new patent law, mandatory utilization of generic (formulary) in Canada and the
Fair Trade Agreement may also enhance the noted differences in the prices. Simply stated, it is
unlikely that these 48 compared drugs are used as frequently in Canada as they are in the U.S.
We would also note that we were unable to obtain consumer retail prices for Canada. Our price
comparisons, while illustrative of differences between public drug programs in the U.S. and
Canada, may not be precise measures of actual differences in consumer retail prices. Finally,



TABLE 1

RETAIL PRICE COMPARISON

CANADA (CANADIAN DOLLARS) % DIFFERENCE
sees estes scene ee dee eee ee eee eec ene CANADIAN U.S. PRICE
U.S. BLUE CANADIAN AVERAGE IN & CANADIAN
DRUG DOSAGE SIZE BOOK PRICE QUEBEC ONTARIO —AVERAGE.-«—«US. DOLLARS AVERAGE

AMOXIL 250 46 «100 $21.07 $17.67 $17.07 $14.46 45.72%
LANOXIN +25 MG = 100 $7.91 $8.56 $7.05 $6.50 21.75%
XANAX -5 4G 100 $44.65 $16.90 $17.48 $14.31 212.04%
ZANTAC « 150 MG 60 $73.63 $61.29 $56.22 $48.91 50.55%
PREMARIN 1.25MG 21 - $6.96 $3.50 $3.66 $2.98 133.56%
TENORMIN 100 HE = 100 388.54 388.57 $81.25 370.68 25.27%
CARDIZEM 30 MG = 100 $29.38 $32.98 $30.30 $26.34 11.55%
TYLENOL /CODE INE 30 300 =100 $12.08 $9.86 $3.55 $5.58 116.44%
SYNTHROID -025MG 100 $10.31 $4.64 $4.30 $3.72 177.09%
CECLOR 250 MG 15 $21.96 $14.44 $13.25 $11.52 90.55%
HALCION +25 MG 100 $42.66 $18.32 $16.79 $14.61 191.94%
VASOTEC 5 MG 100 $68.15 $74.52 $68.36 $59.47 14.60%
ORTHO-NOVUM 1/50 21 $11.53 $10.85 $8.79 $8.17 41.05%
LASIX 40 MG 100 $13.35 $9.86 $9.03 $7.86 69.80%
THEO-DUR 200 MG =100 $18.00 $21.15 $19.40 $20.28 $16.88 6.65%
ORTHO NOVUM 7-7-7 28 $16.60 $9.76 $8.94 $9.35 $7.78 113.29%
LOPRESSOR 100 MG = 100 $55.71 $40.72 $32.86 $36.79 $30.62 81.92%
VENTOLIN 4mG 100 $34.93 $21.77 $15.62 $18.70 $15.56 124.46%
DIALANTIN 100 MG = =100 $13.55 $5.32 $4.76 $5.04 $4.20 222.98%
FELDENE 10 MG 100 $99.25 $73.58 $73.37 $73.48 $61.16 62.28%
VALIUM 10 MG 60 $24.84 $12.68 $7.39 $10.04 $8.35 197.37%
MICRO-K 8 MEQ = 100 $10.05 $10.39 $9.53 $9.96 $8.29 21.22%
PEDIAMYCIN 200 MG = =100 $5.93 $8.74 $5.52 $7.13 $5.94 -0.08%
PROVERA 10 WG = =100 $43.25 $46.98 $43.10 $45.04 $37.49 15.36%
FLEXERIL 10 MG = 100 $76.53 $52.90 $47.73 $50.32 $41.88 82.73%
CLINORIL 150 4G = 100 $75.66 $53.00 $48.62 $50.81 $42.29 78.89%
MINIPRESS 2MG 100 $42.63 $32.36 $32.26 $32.31 $26.89 58.51%
ERYC 250 MG = 100 $25.28 $41.64 $36.93 $39.29 $32.70 +22.69%
TIMOPTIC +25 PC 15 $31.05 $31.97 $21.86 $26.92 $22.40 38.59%
COUMADIN 2.5 MG 100 $26.76 $20.89 $19.16 $20.03 $16.67 60.54%
ATIVAN 1 MG 100 $48.96 $10.14 $7.10 $8.62 $7.18 582.34%
NITROSTAT +6 MG 100 $3.08 $2.80 $2.18 $2.49 $2.07 48.60%
DIABETA 5 MG 30 $10.00 $5.15 $4.72 $4.94 $4.11 143.43%
CORGARD 40 MG = 100 $63.80 $38.60 $39.35 $38.98 $32.44 96.65%
MEVACOR 20 MG 60 $93.75 $94.83 $87.00 $90.92 $75.68 23.88%
KEFLEX 500 KG 30 $55.26 $26.34 $13.54 $19.93 $16.59 233.18%
TRANXENE 3. 75MG 50 $16.15 $10.63 $7.58 $9.11 $7.58 113,09%
LOPID 300 MG = 100 $37.13 $42.44 $39.49 $40.97 $34.10 8.89%
DURICEF 500 MG 30 $43.98 $34.34 $31.50 $32.92 $27.40 60.50%
TRENTAL 400 MG 60 $20.67 $35.86 $32.90 $34.38 $28.62 27.77%
TEGRETOL 200 MG = 100 $29.25 $26.86 $20.26 $23.56 $19.61 49.15%
ALDOMET 250 MG = =100 $27.54 $17.18 $14.12 $15.65 $13.03 114.41%
DEMULEN 1/50 1/50 28 $16.83 $12.84 $11.78 $12.31 $10.25 64.25%
NORINYL 41/50 21 $9.90 $10.02 $9.19 $9.61 $8.00 23.82%
PREDNISONE 5 MG 30 $1.62 $1.23 $0.30 $0.77 $0.64 154.40%
MACRODANTIN 50 MG 60 $29.81 $19.82 $17.01 $18.42 $15.33 94.50%
INDOCIN 50 MG 30 $37.35 $29.46 $9.10 $19.28 $16.05 132.73%
RESTORIL 15 MG 100 $37.50 $16.10 $15.64 $15.87 $13.21 183.87%

TOTAL $1,634.78 $1,006.09 62.49%


Success in negotiating price reductions is dependent on an ability to restrict the payments for
certain high cost drugs in cases where lower cost alternatives exist.

The negotiation efforts of State Medicaid Agencies would be enhanced through Federal efforts to
monitor and provide international drug pricing information.

The Medicaid prescription drug costs per recipient, in 1988, were 22 percent lower in the five
largest states with restricted drug lists.

Implementing restricted drug lists in the 29 non-restricted states could result in estimated annual
savings (Federal and State) of $226 million per year.

RECOMMENDATIONS

The Health Care Financing Administration (HCFA) should reduce its financial participation in
Medicaid prescription drug costs by $261 million per year. This can be achieved by proposing
legislation that permits one or more of the following approaches:

1. Establish State specific cost reduction targets based on the comparison of individual State
drug prices with national and international drug price data. This legislation should
include an ability to reduce federal financial participation (FFP) for States who fail to
achieve these targets.

2. Set specific drug price limits for brand name drugs similar to those in place for
multi-source drugs.

3. Negotiate directly with drug manufacturers for prescription drug discounts and rebates.

The intention of our recommendation is to reduce Medicaid drug expenditures by $474 million,
the amount which could be saved if Medicaid State agencies obtained brand name drugs at the
Canadian prices. Of this amount, an estimated $261 million would be FFP savings and $213
million would be State savings.

It should be noted that OBRA 90 included provisions that involve the HCFA in gathering and
monitoring drug price data and negotiating rebate agreements with drug manufacturers on behalf
of the States. The Congressional Budget Office estimated total savings to be $3.3 billion over 5
years.

COMMENTS

Comments on the draft report were received from the HCFA and the Assistant Secretary for
Planning and Education (ASPE). ASPE had several technical comments which we considered in
preparing our final report. The HCFA generally agreed with the recommendations, the amount



APPENDIX A

AGENCY COMMENTS



Comments of the Health Care Financing Administration
on the OIG Draft Report: Strategies to Reduce
Medicaid Drug Expenditures
(OE]J-12-90-00800)

Recommendation

The Health Care Financing Administration (HCFA) should reduce its financial
participation in Medicaid prescription drug costs by $261 million per year. This
can be achieved by proposing legislation that permits one or more of the
following approaches:

1. Establish State specific cost reduction targets based on the
comparison of individual State drug prices with national and
international drug price data. This legislation should include an
ability to reduce Federal financial participation (FFP) for States
who fail to achieve these targets.

2. Set specific drug price limits for brand name drugs similar to
those in place for multi-source drugs.

3. Negotiate with drug manufacturers for prescription drug
discounts and rebates.

The intention of our recommendation is to reduce Medicaid drug expenditures
by $474 million, the amount which could be saved if Medicaid State agencies
obtained brand name drugs at the Canadian prices. Of this amount, an
estimated $261 million would be FFP savings and $213 million would be State
savings.

HCFA Response

We agree that the Medicaid program should pay less for prescription drugs.
The recently passed Omnibus Budget Reconciliation Act of 1990 (OBRA ’90)
included a major revision which addresses a reduction in the amount the
Medicaid program will ultimately pay for most prescription drugs.

The OBRA 90 provisions partially support at least two of OIG’s legislative
recommendations (i.e., "Set specific drug price limits for brand name drugs
similar to those in place for multi-source drugs" and "Negotiate with drug
manufacturers for prescription drug discounts and rebates.")

The OBRA 90 approach will force drug manufacturers to give the Medicaid
program the benefit of discounts similar to those enjoyed by a variety of others.


EXECUTIVE SUMMARY

PURPOSE

This report evaluates strategies currently used by State Medicaid Agencies and Canadian
provinces in reducing their drug costs and proposes a series of actions to prevent unnecessary

payments for prescription drags.

BACKGROUND

The decade of the 1980’s was marked by rapid escalation in health care costs. The prices of
prescription drugs increased at a rate about four times the rate of consumer products taken as a
whole. Also, drug manufacturing companies -have been experiencing about three times the
pretax profits of all manufacturing industries over the last decade.

In 1989, Medicaid State Agencies paid more than $3.6 billion for prescription drugs. Recently,
States and the Congress have become increasingly concerned about these high and climbing
costs. As a result, the Senate Special Committee on Aging asked us to conduct this inspection.
The results were used in the formulation of Omniubus Budget Reconciliation Act of 1990
(OBRA 790). Some States have established restricted drug lists, known as closed formularies, to
control their outlays for drugs. In combination with this, or as an alternative, many States have
begun negotiating with drug manufacturers for discounts and rebates. However, manufacturers
have frequently made open formularies a condition for price concessions to the states.

This report examines the impact of restricted drug lists on Medicaid drug costs. It also compares
1989 Canadian prices to U.S. prices as a measure of the magnitude of the potential Medicaid
discounts that are available on brand name drugs. The Office of Inspector General issued a
companion report, in draft, February 1991, comparing the U.S. and Canadian prices of
multi-source drugs.

FINDINGS

Almost all brand name prescription drugs are considerably more expensive in the U.S. than in
other industrialized nations.

Medicaid State Agencies paid (including the Federal share) an estimated $474 million more for
name brand drugs than would have been paid at the prices paid by Canadian prescription drug

programs.

Canada’s lower prices were attributable to negotiated price reductions between the drug
manufacturers and provincial government.




RECOMMENDATIONS

The HCFA Should Reduce Its Financial Participation In Medicaid Prescription Drug Costs
By $261 Million Per Year. This Can Be Achieved By Proposing Legislation That Permits One
Or More Of The Following Approaches:

1.

Establish State specific cost reduction targets based on the comparison of individual State
drug prices with nationai and international drug price data. This iegisiation shouid include
an ability to reduce Federal Financial Participation (FFP) for States who exceed these
targets.

In establishing State reduction targets, HCFA should take into account actual drug price
differences as well as differences in drug utilization patterns. We also suggest that HCFA
enhance the ability of State Medicaid Agencies to negotiate lower prescription drug prices
by providing them with national and international drug price information.

At the State level, these price reduction targets can be achieved through one or a
combination of the following:

> the creation or expansion of restrictive drug lists,
> State negotiations with drug manufacturers, or

> formulation of multi-State buying groups to negotiate discounts and rebates on
their drug purchases.

Set specific drug price limits for brand name drugs similar to those in place for
multi-source drugs.

Price limits established by HCFA in 1987 for multi-source drugs have proven effective in
limiting drugs outlays for multi-source drugs. We suggest imposing similar limits for
brand-name drugs. A determination of upper limit prices could be based on the best
available U.S. prices or other national or international drug price data.

Negotiate directly with drug manufacturers for prescription drug discounts and rebates.

The HCFA could commence national Medicaid negotiations to arrive at either a system of
rebates and discounts or to arrive at a price limit for brand name drugs.

The intention of our recommendation is to reduce Medicaid drug expenditures by $474
million the amount which could be saved if Medicaid State agencies obtained brand name
drugs at the Canadian prices. Of this amount, an estimated $261 million would be FFP
savings and $213 million would be State savings.



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Date
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DEPARTMENT OF HEALTH & HUMAN SERVICES OL ee Financing Administration
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Memorandum
DEC 1 7 1990

Gail R. Wilensky, Ph.D.
Administrator

OIG Draft Report - Strategies to Reduce Medicaid Drug Expenditures
(OEFI-12-90-00800)

The Inspector General =
Office of the Secretary

We have reviewed the subject report which evaluates strategies currently
used by States in reducing their Medicaid drug costs and proposes actions to
prevent unnecessary payments for prescription drugs.

The OIG recommends that HCFA reduce its financial participation in
Medicaid prescription drug costs by $261 million per year. To accomplish this,
OIG recommends that HCFA propose legislation to achieve one or more of
several legislative approaches outlined by OIG.

We agree with OIG’s position that the Medicaid program should pay less
for prescription drugs than it is now paying. We note that the recently passed
Omnibus Budget Reconciliation Act of 1990 contains provisions that partially
support at least two of the legislative options suggested by the report’s
recommendation. Comments on the recommendation and the report in general
are attached.

We appreciate OIG’s work on Medicaid prescription drug payment and
thank you for the opportunity to review and comment on this draft report.
Please advise us whether you agree with our position on the report’s °
recommendation at your earliest convenience.

Attachment