New Medicaid Drug Payment Rule

Source: U.S. Department of Health and Human Services, Centers for Medicare & Medicaid Services, Press Release, July 6, 2007

A new method of setting limits on what the federal government will reimburse state Medicaid agencies for prescription drug payments — aimed at reigning in inflated drug product payments — was announced today in a final rule put on display at the Federal Register.

“This new payment formula allows Medicaid to pay more appropriately for prescription drugs dispensed to Medicaid beneficiaries,” said Leslie V. Norwalk, Esq., acting administrator of the Centers for Medicare & Medicaid Services (CMS).

The new regulation is expected to save states and the federal government $8.4 billion over the next five years. Even with this change, the Medicaid program is still expected to spend $140 billion for drugs over the same time period, fiscal years 2007 through 2011.

The change, part of the Deficit Reduction Act (DRA) of 2005, is in part a reaction to a series of reports issued in 2004 by both the Government Accountability Office (GAO) and the HHS Office of the Inspector General (OIG) showing that Medicaid payments to pharmacies for generic drugs were much higher than what pharmacies were actually paying for those drugs.

Both the GAO and the OIG found that states were overpaying for drugs because they were using commercial drug pricing guides as the basis for setting state reimbursement levels. The investigation of these drug “compendia” documented that these prices were artificially inflated, especially for generic drugs. Pharmacies, the reports showed, made the most profit on those generic drugs with the highest mark-up, creating an incentive to dispense those drugs.
+ Full text of rule

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