us-ftc-advocacy-filings-3e34f8a4adb8974b0a21a0c851b7c26d•FTC Staff Comment Before the Department of Health and Human Services Concerning Medicaid Reimbursement of Pharmacies
FTC Staff Comment Before the Department of Health and Human Services Concerning Medicaid Reimbursement of Pharmacies
us-ftc-advocacy-filings-3e34f8a4adb8974b0a21a0c851b7c26dFTC Staff Comment Before the Department of Health and Human Services Concerning Medicaid Reimbursement of PharmaciesAdvocacy Filing
BERC-356-E.
COM.\1ENTS OF THE BUREA US OF ECONOMICS,
CONSUMER PROTECTION AND CO\1PETITION OF THE
FEDERAL TRADE COM\lISSION
Washington, D.C. 20580
October 20, 1986
Introduction
The staff of the Federal Trade Commission ("FTC") is pleased to offer
comments on the Notice of a Proposed Rule published by the Health Care
Financing Administration ("HCFA") of the U.S. Department of Health and
Human Services. l HCFA requests comments on three alternative systems for
determining the maximum level of federal funding for state reimbursement of
retail pharmacies for drugs dispensed to Medicaid customers. In fiscal year
1984, Medicaid program expenditures on prescription drugs totalled a bou t $2
billion. 2
The FTC has a long-term interest in the development of competition in
the prescription drug market, as reflected in a number of FTC studies
assessing competitive conditions in that market. 3 Further, the FTC and the
1 On the subject of Limits on Payments for Drugs in the Medica:d
Program, file cede BERC-356-P, 51 F.R. 29,560 (August 19, 1986) (hereafter
referred to as the "Notice"). These comments represent the views of the
Bur~aus of Economics, Consumer Protection and Competition and do not
necessarily reflect the views of the Federal Trade Commission or any
individual Commissioner. The Commission, however, has authorized the filing
of these comments. Inquiries regarding these comments should be directed
to John Woodbury, Bureau of Economics.
2 R. Helms, "Statement by the Acting Assistant Secretary for
Planning and Evaluation, Department of Health and Human Services, Defore
the House Subcommittee on Health and the Environment" (July 15, 1985), p.
2.
3 These studies include R. Bond and D. Lean, Promotion and Product
Differentiation in Two Prescription Drug \1arkets (FTC', February 1977);
Bureau of Consumer Protection, FTC, Drug Product Selection (FTC, 1979)
(hereafter, "Bep"); and A. Masson and R. Steiner, Generic Subst::ution and
Prescription Drug Prices (FTC, October 1985) (hereafter, "Masson and Steiner").
Food and Drug Administr:ltion ("FDA") jointly develope': :l model state law
th:lt would permit pharm3cists to substitute lower-price: ··ersions of a drug
for more expensive versions. 4 It is against the :-:;.::kground of our
experience and expertise in examining the prescription c~:..:g market that we
offer these comments to HCF A.
In section I, we describe the current reimburserne::! scheme and the
proposed alternatives. Section II discusses the goals against which the
alternative proposals should be evaluated. In sections III, IV and V, we
assess the extent to which the proposed alternatives a,e likely to attain
these goals. In section VI, we summarize our _conclusions and
recommenda tions.
In brief, the touchstone of our analysis is econor:::: efficiency. No
reimbursement scheme should unnecessarily skew marketpJ::.:e outcomes to the
detriment of Medicaid and non-Medicaid consumers alike. Unfortunately, the
current reimbursement scheme may have unduly hindered competition by
limiting the incentive to dispense the lower-cost versio~5 of drugs. This
may have occurred because relatively few of the dr::~ categories with
multiple versions of the drug available were included in :he current scheme
that encourages pharmacists to dispense lower-cost versio:ls of the drug to
Medicaid consumers. We therefore endorse HCFA's intention under each
alternative to expand the number of drug categories for which there is an
incentive to dispense lower-cost versions of the drug. F~rther, we suggest
that HCFA consider complementing the pharmacist's incentive to dispense
lower-priced versions in a drug category with an incenti"e (::amely, a
4 See BCP, pp. 273-288.
2
percentage copayment) for Medicaid consumers to search :lmong ph:lrmacies for lower-cost drugs. However, none of the proposals permit Medicaid co::sumers to register their preferences for a particular version of a drug, inclu.::ng a brand name. As a result, the proposals may unnecessarily discourage tr:e development of brand-name reputations and non-price differences amor.g therapeutically- equivalent drug products. Brand names may provide consumers with valuable information regarding non-price differences among versions in a particular drug category. We therefore suggest that in whatever s:heme is adopted, HCFA permit Medicaid consumers to purchase the versic::l. of a drug they prefer if they are willing to pay the difference between the price of the preferred version and the reimbursement level determined by HCFA. For each proposal, we also suggest that HCF A carefully consider wha t the most efficient distribution system for the delivery of prescription drugs to Medicaid consumers might be. A lower reimbursement level will reduce the costs of the program to the government. However. the number and quality (for example, locational convenience) of participating pharmacies may fall as the reimbursement level is reduced. Consequently, the accessibility of pharmacies to Medicaid consumers may decline. In selecting the reimburse- ment level that yields the most efficient distribution system, we suggest that HCFA balance the gain in government savings from lower reimbursement levels against the costs of reduced accessibility of pharmacies to Medicaid consumers. While we offer a number of suggestions concerning reimbursement schemes, a lack of available data prevents us from determining which of 3
the proposed alternatives is best. We suggest the kind 0:" further analysis that might be undertaken to eliminate these information ga;:s. 1. THE CURRENT AND PROPOSED :-'1EDICAID REl~1BCRSE\fE0JT SYSTE\1S FOR DRUGS While the states are directly responsible for imple:::.enting Medicaid programs, the rules governing federal reimbursement of state Medicaid expenditures exert a strong influence on the state programs. The purpose of the current federal-state program is to reimburse the retail pharmacist for the entire cost of a Medicaid prescription drug beyond the small fixed copayment that may be paid by the consumer. 5 States set C:1ny rules, which may include the consumer's copayment, a list of c:-ugs for which reimbursement will be made, mandatory substitution of lowe:- cost versions of a drug for higher cost versions, and the amounts of rei:::bursement. The state in turn is reimbursed by federal monies, in accord::nce with HCFA regulations. It is these HCFA regulations that are now to be :-evised. The federal Medicaid drug reimbursement system curre:1tly in place is a composite .of several interlocking elements. The HCFA regulations for the reimbursement for multisource drug categories (i.e, drug c::.:egories with two or more therapeutically-equivalent versions a v ailable)6 req::ires payment by 5 Twenty-two states currently require a fixed;opayment, most frequently $.50 or $1.00. Drug Topics (March 24, 1986), p. 29. For some drug categories with multiple versions of the drug availz:le, these typical copayments amount to 9 percent and 18 percent respectively of the average price of the 10"'Jer-priced versions. The price data used is from Professional Management Associates, Inc., Interim Report on Medicaj-' Reimbursement Policies (September 8, 1986), Table I, Column I. The imposition and magnitude of copayments are governed by 42 U.S.c. Section 1396(0). 6 Multisource drug categories are those with two or more products containing the same active chemical ingredients. Many :nultisource drug categories contain products that are both chemically ac: therapeutically equivalent. In this Comment, we confine our attention to that class of multisource drug categories that contain chemically an': therapeutically 4
HCFA of the lowest of a) the usual and customary re:3.il price of the
indi\'idual pharmacist In question for the exact product dis;;ensed, h) the sum
of a dispensing fee and the Estimated Acquisition Ccst (to the retail
pharmacy) ("EAC") of the drug product or c) the sum of 3. dispensing fee
and the Maximum Allowable Cost ("MAC") of the drug. The MAC system
was designed to encourage pharmacists to dispense low-:ost generic drug
products. For multisource drugs for which no ~1AC limit has been
esta blished, reimbursement is the lower of (a) or (b).7
In place of the current scheme, HCF A proposes to adopt one of three
alternatives for multisource drug reimbursement: (a) a re\'ised MAC program;
(b) a Pharmacists Incentive Program ("PhIP"); or (c) a Co~petitive Incentive
Program ("CIP"). For all three alternatives, the list of drugs to be included
in the special multisource reimbursement schemes would encompass all drug
categories that are deemed by the FDA to contain therapeutically equivalent
equivalent drug products. Within that class, we often refer to "geDeric"
versions of a drug, products chemically and therapeutically equivalent to the
leading or pioneer versions of the drug. Finally, the discussion below
focuses only on schemes which reimburse the pharmacist for dispensing
particular products in a multisource drug category when the pharrr:.1cist has
the discretion to select the particular product dispensed. The FTC's
expertise is most extensive in the assessment of competition in the
multisource drug categories.
7 The prescription dispensing fee is set in each state after
pharmacies' costs of dispensing are surveyed and analyzed. Dispensing fees
are updated occasionally. The EAC is established by the states by reference
to published sources of advertised wholesale prices for individual products.
Finally, the MAC system applies to a small list of multisource drugs for
which the maximum allowable cost for each drug category is currently
established at the 70th percentile of actual wholesale invoice costs of
pharmacists as determined from survey data. Thus, pharmacies dlspensing a
drug under the MAC system receive a fixed level of reimbursement regardless
of the particular manufacturer's product actually dispensed, provided that the
EAC of the drug product dispensed is greater than the \L\c. The list of
multisource drugs for which MAC limits are determined is set by HCFA after
a period of public comment and in consultation with the FDA. The MAC
limits are also established by HCFA after a period of public comment.
5
products 8 and for which the advertised wholesale prJces of at least three suppliers are included in the most current edition of the Red Book or Blue Book. standard industry sources. The MAC limits in the revised MAC proposal would be determined in streamlined administrative proceedings. EAC and the dispensing fee would continue to be determined as in the current program. Under the PhIP proposal, reimbursement of multisource drugs would be :' specific percentage (for example, the HCFA - proposed 150 percent) of the lowest price advertised in each multisource drug category in the most current Red Book or Blue Book, plus an estimated reasonable dispensing fee. However, HCFA also proposes to limit the payment to no more than $4.00 and no less than $1.50 above the lowest price advertised in each multisource drug category. Under CIP, HCFA proposes to use as the basis of its reimbursement limits for all (not just multisource) drugs the actual price charged by the pharmacist to its non-Medicaid customers, less a discount of 5 or 10 percent. However, if the pharmacist chooses to dispense a higher-priced leading brand when a lower priced generic version could ha ve been dispensed, the discoun t rises to 25 percent. HCFA is also proposing that in no case would the CIP reimbursement exceed 125 percent of the median retail price in the state for a particular manufacturer's product. 8 The list includes all drug products in a specific drug category that are identical in terms of their active chemical ingredients, dosage form and strength and that have been classified as "A" in the FDA's A::mroved Drug Products with Therapeutic Equivalence Evaluations. 6
II. GOALS OF REVISION In assessing the proposed schemes as well as the r:::!.sons for HCFA's dissatisfaction with the current !\-1AC program, we begin t:. noting that any reimbursement program should contribute to a num:er of sometimes conflicting goals. A. Economic efficiency. First, any scheme of prescription drug reimbursement should contribute to economic efficiency. Thus, the scheme should not hinder the development of market mechanisms that assist consumers (i.e., reduce their costs) in making product choices; that facilitate the least-costly dis:ribution of goods to consumers; and that promote price competition or, 10 2. dynamic market environment, promote the production of new goods and product attributes desired by consumers. A scheme that unnecessarily irr.pedes the use or development of such mechanisms or otherwise unne;:essarily distorts marketplace outcomes may impose costs on Medicaid and non-Medicaid consumers that must be weighed against any resulting administrative or reimbursement cost savings to the government. For example, in many economic markets, firms haye an incentive to develop a brand name reputation. While consumers may NY a higher price for brand name goods, brand names often have value to consumers because they may indicate that the expected quality of a product is higher than that for non-branded products, and the existence of brand D:lmeS reduces the costs of consumer search for products that best satisfy consumer demands. Brand names provide an incentive for firms to develop ;:,roduct attributes that consumers value and to compete along these and other non-price dimensions, for example, by communicating these non-price differences (as 7
well as price differences) to consumers via advertising. The information contained in advertising is valuable to consumers not only directly but also indirectly because it may facilitate entry by new suppliers and thus advances competition. Thus, the selected reimbursement scheme should not unduly hinder new product introduction, brand name differences and other non-price diIi:ensions of competition, just as it should not hinder price competition. B. Incentive to dispense the lowest-cost generic product. One significant reason why HCFA is considering repl:1cing the current reimbursement scheme is to reduce the government's reimbursement costs by encouraging Medicaid consumers to seek out and pharmacists to dispense the lowest cost generic drug products. This goal will be easier to attain as the number of multisource drug categories that fall within this incentive scheme increases. If multisource drug products were reimbursed at a fixed level, the structure of the current MAC program would yield incentives for low-cost generic drug dispensing for drugs on the MAC list: in dispensing a MAC drug, the pharmacist could retain the difference between his actual acquisition plus dispensing costs and the MAC plus the estimated dispensing cost. However, it is our understanding from discussions with HCFA staff tha t, at least for some MAC drug products, the EAC is less than the MAC.9 Consequently, the incentive to dispense the lowest cost generic drug product 9 This can occur because each MAC is determined by reference to the range of wholesale prices fer all drug products within a particular drug category. By contrast, the EAC is established for each specific drug product. 8
may be reduced under the current MAC scheme. lO Even if :his were not the case, the current administrative machinery has proven cost]:. and cumbersome for determining which multisource drug categories should :-::ne MAC limits and what those limits should be. Consequently, only a relatively sm:l!l number of multisource drug categories have HCFA - determined MAC limits. The opportunity for government savings through enhancing the incentive for low-cost generic use is large. 11 Approximately two-thirds of all prescriptions written in the U.S. are for multisource drug categories. The difference between the price of the leading brand in a prescription drug entity and the price of alternative brands in the same entity is typically large. 12 Savings depend not only on whether the pharmacist dispenses a generic drug product but also on which generic is selected because of the wide variation in the cost to the pharmacist of different generic versions of 10 For example, consider two versions, A and B, in the same drug category. The MAC for both is $5 and the (correctly estiQated) dispensing fee for both is $3. The EAC for A is $5.50 while that for B is $4.50. The actual wholesale price to the pharmacist is $4.00 for A and S3.75 for B. If the pharmacist dispenses the lowest-cost version (B), the amount of reimbursement is $7.50 (EAC plus dispensing fee), leaving the pharmacist with a profit of $.75 ($7.50 less dispensing costs less the wholesale cost). If instead A is dispensed, the reimbursement would be 58.00 (MAC plus dispensing fee), leaving the pharmacist with a S1.00 profit. 11 One indication of the savings potential from restoring the incentive to use generic drug products in the Medicaid program is an estimate of savings due to states' allowing generic substitution. An FTC staff report estimated the annual reduction in consumer expenditures attributable to state policies that permit generic substitution to be $44 million to $80 million in 1980 and perhaps three times that in 1984. Masson and Steiner, p. 183. 12 A 1980 average price across 37 leading multi-source drugs, weighted by number of prescriptions sold, was $8.22 for the leading brand and $6.22 for the average of other brands, a difference of $2.00, or nearly 25 percent of the leading brand price. Masson and Steiner, pp. 5, 356-36. 9
the same drug. 13 Thus government savings can be incre:E:::d if pharm:lcists choose low-cost rather than high-cost generics. C. Pharmacy particiQ3tion A third goal is the selection of the most efficient SCt of pharmacies to handle Medicaid drugs. 14 The level of Medicaid reimbursement will affect not only the number of pharmacies that opt to participate but also the "quality" of such pharmacies. Other things being equal (for example, the number and types of Medicaid prescriptions dispensed, thc incentive for the pharmacist to dispense the lowest-cost generic product, and the administrative costs), a lower reimbursement level will not only reduce government costs but also reduce pharmacy participation and accessibility of participating pharmacies to Medicaid consumers. 1S The Notice describes HCF A's concern that in fact many pharmacists have had difficulty in acquiring drugs at or below the MAC levels in the current scheme. 13 In the 1984 Red Book, for example, the wholesale price per 100 tablets/capsules of allopurinol, other than the leading brand, ranged from $14.65 to $33.68; for amoxicillin from $8.95 to $27.25; for metronidazole from $28.75 to $54.40; for amitriptyline from $2.10 to $10.48. The extent of price dispersion among generic products is puzzling. One would expect that pharmacists would be knowledgeable about the therapeutic equivalence of generic products and therefore that competition among generic product manufacturers for the patronage of pharmacists would greatly reduce the degree of price dispersion. One possible explanation is that the dispersion among transactions prices is far less than tha t for ad vertised prices. Alternatively, these price differences may reflect real non-therapeutic differences among generic products. 14 Our understanding from discussions with HCFA officials is that most U.S. pharmacies currently participate in the Medicaid program. 15 To the extent that many pharmacies depend upon Medicaid consumers for purchases of drugs and other goods, such pharmacies migh t exit the industry if the reimbursement level is not sufficient to profitably maintain their participation in the Medicaid program. 10
D. AdministrJtivc costs A fourth goal of any rcimbursemcnt scheme IS to reducc the administrative costs. including any costs required to Insurc that the reimbursement limits accurately reflect changing market conditions. As notcd above, the current administrative process for determining MAC limits has proven unwicldy. III. EFFICIENCY EVALUA nON All three proposals encourage greater use of generic drug products by expanding the set of multisource drugs for which the dispensing of generic drug products would be encouraged from the present rebtively short MAC list to a much larger FDA lisL 16 The FDA therapeutic equivalence list reflects the fact that for many multi source drugs there is now substantial agreemen t that no serious therapeutic ineq ui valence problems exisL 11 Under the current administrative scheme, neither the pharmacist nor the customer has the incentive to dispense or use the lowest cost version of 16 Compared to PhIP or CIP, the universe for possible generic substitutions at any given time might be somewhat smaller under the revised MAC plan simply because of delays in adding new products or new generic entities. The revised MAC system requires publication of notices of proposed actions, with a comment period to follow, before a drug is added to the MAC list. However, the revised MAC proposal would streamline the current administrative process. 11 However, two same-strength products in the same generic entity, containing the same active chemical ingredients in identical proportions, may not always have the same effects in a patient, because differences in inactive ingredients used for binding or coloring may modify the effects of the active ingredients or create their own unintended side effects. Further, therapeutically equivalent products may differ with respect to flavoring, color, shape, packaging, and shelf life. FDA, Approved Prescription Drug Products with Therapeutic Equivalence Evalua tions (1985), pp. 1-2, 1-3. For a more extensive discussion of these and other differences, see M. Lieberman, The Essential Guide to Generics (Harper and Row, 1986), pp. 4-11. 11
a multisource drug in many multisource drug categorics. IS T:'is government- induced indiffcrcnce in the currcnt schemc rcprding ·.. hich non-\1A.C multisource drug IS dispensed may havc unduly limil~': thc extent of compctition among generic drug products and bctwec:1 ge:-.cric and brand name drug products, thereby raising the cost of the \1cdicai:: program to the government and the costs for non-Medicaid consumers as ·"'"ell. However, because the three multisource reimbursement proposals fOC~5 exclusively on encouraging the dispensing of In"'-cost generic products, the:; appear to veer too far in discouraging the development of brand names anj non-therapeutic differences among drug products. Between these two extrer::es, we propose a straightforward middle ground. A. Benefits from encouraging pharmacists to dispen5~ 10'wer-cost drug products Information about American consumers in general su~gests that many feel ill-informed about generic drug products. 19 This concluoion is supported by a recent FTC study which points to consumers' lack of ;nformation as a major cause of reluctance to accept a generic d.rug produc!.:) For example, 18 For non-MAC multisource drugs, the pharmacist is currently reimbursed at EAC plus the estimated dispensing fee. If these estimated costs were accurate, the pharmacist would have no incentive to dispense a lower cost product instead of a higher cost product to lv1edicaid customers. Because Medicaid customers bear at most a small fixed dollar copayment for the purchase of the drug, they also have no incentive to request a lower cost product. 19 According to the CBS Consumer Model, a national survey done in 1983, consumers rate themselves as being either "not very informed" (29 percent of the sample) or "somewhat informed" (25 percent of the sample) on the effectiveness of generic prescription drugs; 45 percent said they were "not at all informed". On brand versus generic prescri;:'tion costs, the typical consumer was less than somewhat informed. The CBS survey used a national probability sample of households. The CBS Consu:::.er Model, 1984, p. 14. 20 Masson and Steiner, pp. 5-7. 12
the study shows that consumers are more likely to 3.::~~t generic drug products if they feel their doctor has certified their apr~:;:riateness.21 The most likely explanation of this behavior is that consumC~5 2nd pharmacists) interpret the fact that physicians specify a brand as a St~:~g preference on the physician's part for that particular brand, even when the physician has not chosen to exercise the legal option to prohibit substit>.;:i0n explicitly, an option available on every prescription. The physician rna:; :;ot, in [act, have a strong preference, but the consumer's uncertainty deters acceptance of a substitute brand. n 21 Consumers accept generic substitutions at the pharmacy only a small fraction of the time when the physician has name: a brand (on 7.3 percent of prescriptions on which substitution was permitted in 1980), yet they accept generics nearly all the time (89 percent ir: 1980) when the physician prescribes generically. Masson and Steiner, pp. :-.116-117. In the U.S. market as a whole, use of generic drug products is i:.:reasing rapidly. The market share of generic drug products in 1980 was at-out 25 percent of 45 leading multisource drugs dispensed. Masson and Steiner, p. 117. Officials at the Pharmaceutical Manufacturers Association report that a drug- by-drug analysis of the market share of generic drug products shows substantial increases between 1980 and 1986, citing :ncreases of 20 percentage points in some instances. These increases are :onsistent with a heightened consumer understanding of the therapeutic equivalence of lower- priced generic products and the higher-priced brand names. The rise in the market share of generic drug products may alsc reflect ~::cent changes in state laws that now permit the pharmacist to substit:::e generic drug products on a prescription written for a brand name (p~ovided that the prescribing physician does not explicitly prohibit such substitution). Masson and Steiner, p. l. As a result of these changes in state laws, the percentage of brand-written multisource prescriptions on wilich substitutions were made nearly doubled from 5.1 percent to 9.5 percent cetween ~ 980 and 1984. Stephen C. Chappell, "1 st 6 Months of '84: Independents & Drug Chains Dispensed 775.7 Million Prescriptions." Pharm3~'; Times, October 1984, pp. 25-31. 22 HCFA notes that it intends to retain the requ:rement that any physician veto or override of substitution must be certified :0 the physician's own handwriting. We endorse retention of this requir:ment. Previous research has consistently demonstrated that the format 0:- the physician's prescription pad has a substantial impact on the incide:.ce of physician overrides. For example, one study found that substitution was 18 percentage points higher for formats requiring more physician ef:'ort to override substitution than for other formats. See Masson and Steine~. ;Jp. 89-97; 100- 13
HCFA is of course fully aware of the therapeutic e'::;'~~valence between lower-cost glneric products and higher-priced brand ;::,mes. 'Yet, by reimbursing non-MAC multisouree drugs dispensed at L-\C. HCFA's scheme provides no incentive for ph:Hmacists to dispense lower-cc-s: drug products. 23 This may have adverse consequences for consumers (inclu'::ng non-Medicaid consumers) by reducing the availability of generic proc·~:ts, by reducing downward pressure on prices, and by slowing the diffusior::C information to consumers about therapeutic equivalence. By expanding the number of multisource drug categories for which there are incentives for pharmacists to dispense lower-cc~t drug prod ucts, the three proposals ameliorate these inefficiencies. The res·.;lting increase in competition may cause generic drug prices to decline. In each of the proposed alternatives, these benefits cnld be magnified if the pharmacist's incentive to dispense lower cost generi: products were complemented by incentives for the Medicaid consumer to request these products and to shop among pharmacies for the lowest-price: version in each drug category. We would therefore suggest that HCFA consider a requirement that Medicaid consumers pay a percentage :opayment. We recognize that HCFA must weigh the efficiency benefits of a copayment 101; and 106-107. See also, C. DeVito, W. Dickson, and J. Gbel, "Evaluating Kentucky's Generic Substitution Law" in Generic Drug La":s: A Decade of Trial--A Prescription for Pr02ress (U.S. Department of He::lth and Human Services, June 1986), pp. 401-402. 23 Indeed, the pharmacist may in fact be inclined :0 dispense brand names rather than generic drug products under EAC. For example, consider a Medicaid prescription written generically or for a brand name but which permits the pharmacist to substitute a generic drug p~oduct. If the pharmacist were to dispense the generic product, the pharffi:1cist might have to bear the cost of explaining to the Medicaid patient that the generic product dispensed is therapeutically equivalent to the brand C1me product. 14
against any income distributional considerations. par!i,:ujJ~ly the possibility that for very expensive drugs, a copayment may be oner:::,;.:s for the \1edic3id consumer. 24 We note, ho\.... ever. that the three proposals He not identiol with respect to the pharmacist's incentives to dispense the lowest-cost products in any particular drug category. PhIP clearly creates a;; incentive for the lowest cost generic drug product to be dispensed because the pharmacist can retain the difference between the PhIP limit plus the estimated dispensing fee and the pharmacist's true wholesale and dispensing costs. Because the EAC of many products within each multisource drug category may be below the MAC, the revised MAC proposal may not create as i!luch incentive for the pharmacist to dispense the lowest-cost generic product. The proposed 25 percent brand-name discount in the CIP proposal will certainly encourage the pharmacist to dispense a lower-priced generic product instead of a brand name product. 25 However. we can detect no 24 One way of ameliorating this particular con:ern would be a graduated copayment schedule. For example, on any prescription the Medicaid consumer might provide a copayment of 20 percer:.t on the first $20 and 5 percent on anything over $20. We recognize that implementation of this recommendation would require statutory changes. 25 We note that under CIP, prices for muItisource products other than the leading brand would be discounted by 5 or 10 percent. There seem to be three reasons for this particular discount. First, data shov.· that EAC levels are approximately 10 percent below retail prices to private pay customers. (New results from HHS contractor's analysis, as reported by Walt Francis of HCFA.) This suggests that, in the absence of a Medicaid discount, reimbursement levels would be higher than Current reimbursement levels. Second, pharmacies often provide "senior citizens· discounts of 10 percent. Third, through Medicaid the government is a volume buyer. Volume discounts appropriat:::ly reflect real savings when it is cheaper to deal with one large buyer than with several smaller ones. However, Medicaid transactions occur individually. It is difficult to argue that the real costs to the pharmacy are lower because the prescriptions are for Medicaid customers. On the contrary, pharmacies' costs m:?y be higher for Medicaid prescriptions than for cash-paying customers bec3use of paperwork 15
mechanism in CIP that would encourage the pharma~i:;: to dispense the lowest-priced gener ic. Z6 B. Costs of excessivelv discouraging use of br:lnd-n3:":':~ drug products While the current multisource reimbursement s~~eme m3.Y h3.\'e unnecessarily hindered competition between brand name 3.nC generic products, at least two of the three alternatives (PhIP and CIP) ap;;ear to discourage the potentially efficient development of brand-name rep'Jtations and non- price differences among therapeutically-equivalent drug products. 27 A policy actively discouraging brand-name dispensing is predicated on the assumption that informed consumers will be indifferent between two drug products that and delays in reimbursement. Therefore, if volume purch2.ocs under Medicaid were the proferred basis for the discount, we would recommend elimination of this discount. 26 In a recent supplementary Notice, HCFA expressed concern about an apparent anomaly in the CIP proposal. HCFA noted that CIP might generate a reimbursement level for the highest-priced generic product dispensed that is greater than the brand-name reimbursem~nt level (after the 25 percent discount is applied to the brand-name product'j. Federal Register (September 18, 1986), pp. 33086-33087. HCFA considers two alternatives to reduce the incidence of this anomaly. The first is to supplement the 25 percent brand-name discount with a limit on the reimtursement for any generic product, the limit being no more than 75 percent of the median leading brand price. While this proposal, if adopted, may have the advantage of both discouraging the unilateral dispensing of higher-priced generic products by the pharmacist and of limiting the extent of the anomaly, CIP as modified would still not provide incentives for dispensing the lowest-priced generic product. HCFA's second alternative would be to raise the reimbursement level for brand name products. Raising the reimbursement level for brand-name products would not reduce the pharmacist's incentives to dispense brand-name products. Other things equal, the first alternative seems preferable. 27 Because it sets a fixed reimbursement lever, PhlP encourages the dispensing of lowest cost generic products. Under CIP, the pharmacist would receive only 75 percent of the retail price charged if a brand name were dispensed. The incenti\'Cs in the revised MAC are less cle:.H if the EAC of many drug products falls below the MAC level. The marginal profit from dispensing a brand-name product could be greater or less than that from dispensing a generic product. 16
arc therapeutically equivalent. This m3Y not in fact be the ':3se. To use an extreme example, a Yugo and a Rolls Royce may be "tr3nsport3tionally equivalent" but they are not homogeneous in the view of consu;ners. Therapeutically-irrelevant product differences mig~~ include. for example, the incidence of side effects that are annoying to consumers without posing health hazards, the size and shape of the 13 bIer. and taste. A brand name or the development of a reputation for qualit:: may signify to the consumer that the probability of experiencing annoying side effects is lessened. By focusing on price as the only important differer.:e among drug products, HCFA may discourage the development of therapeu:i:ally equivalent drugs that differ in important dimensions to consumers. Similarly, HCFA may discourage advertising to doctors and pharmacists and the development of brand names in prescription drugs even if these brand names convey useful information to consumers. Further, if the current virtual FDA ban on direct consumer advertising of individual prescription drugs ""ere relaxed, the incentive of drug manufacturers to provide information via su.:h advertising may be diminished under any of the HCFA schemes. 28 We are not aware of any evidence that would indicate the extent to which consumer perceptions of non-price differences among therapeutically equivalent drugs are important. Experience in other markets, however, clearly suggests the importance of non-price differences to consumers. For 28 Evaluating the role of brand names and thus the source of price differences between brand name and generic drug products i:l a multisource drug environment is difficult in part bc:ause of the virtu::i1 FDA ban on direct consumer advertising of prescription drugs and therefore the lack of this particular source of consumer information on the products of individual drug manufacturers. See A. Masson and P. Rubin, "Plugs for Drugs," Regula tion (September jOctober 1986), pp. 37-43 ff. 17
eXJmpJc, following airline deregulation, a hitherto unknow;; variety of price- sen'lce options available to consumcrs bcgJn to flourish. \\::h the 3dvcnt of the Jdvertising of legal services. J numbcr of "no-frilis' 3nd low priced services were offered to consumers. Brand nJmcs ha\'c pI:;: cd an importJnt role in efficiently guiding consumer choice In produc:s rJnging from appliances to fJst-food chJins. We recommend that in the reimbursement scheme ac::;pted by HCFA. Medicaid consumers have the option of purchasing any :!1ultisource drug provided they pay the pharmacist the difference betwcen the market price of the purchased drug and HCFA's reimbursement leve1. 29 C. Conclusion. In sum, the current HCFA reimbursement scheme for multisource drugs may artificially inhibit competition between generic drug products and brar.d name products as well as among generic drug products. The multisource coverage of the current MAC scheme is limited, and neither pharmacists nor Medicaid consumers have an incentive to select the ]C',"'er-cost generic 29 For this reason, we recommend that the 25 pe~cent brand-name discount in the CIr plan be replaced with a less costly alternative. For Medicaid consumers that wish to purchase a higher-cost version of a drug in the CIr plan, we suggest that such consumers pay the diiference between the price of the lowest cost product dispensed by the ph:irmacist and the higher cost product. The pharmacist, in turn, would be reimbursed by the government for the price of the lowest-cost generic dispensed. Should HCF A choose to retain the 25 percent discount, then we would suggest that the Medicaid consumer reqLesting a brand name product pay the pharmacist 25 percent of the brand name price. In either case, the pharmacist will be di~couraged from choosing to dispense a brand-name product to a Medicaid consumer unless the consumer values the higher priced drug sufficiently. Because the CIr reimbursement rules as originally proposed distinguish between leading brand and generic products, we note that !he leading brand in each drug category must be unambiguous. Yet HCFA offers no definition of a leading brand. We suggest that HCFA consider defining the leading brand product as the pioneer product. HCFA might also require that a leading brand be defined as any product named by physici3::s on at ';;ast, for example, 30 percent of all prescriptions in the particular drug ca tego.)'. 18
products in many cases. Consequently, fewer generic alternatives may be available. the prices for available generic drug products ;:1:1Y be higher, and the price of the brand name drug product may be higher than would be efficient. Because of the greater rate of generic prvduct introduction expected as a result of the streamlined FDA approval pro.::ess mandated in the Hatch-Waxman Act, the costs of limits on the dispensing of generic drug products in the future would be enormous. Because all three proposed alternatives will expand the number of multisource drug c::negories included under a reimbursement scheme designed to promote greater use of generic drug products, all are improvements over the current scheme. However, only PhIP appears to create unambiguous incentives for the pharmacist to dispense the lowest-cost generic product. However, we note that the assumption that therapeutic equivalence implies product homogeneity in the view of consumers rna y not be correct. We would therefore urge HCFA to modify whatever scheme is adopted In order to avoid unnecessarily discouraging the use of brand name products by consumers willing to pay the higher price and thereby avoid discouraging the development of non-therapeutic differences across drugs, investment in brand names, and non-price competition. Within the framework of the efficiency goal, we would also suggest that HCFA compare its current and proposed schemes of prescription drug reimbursement and distribution to those developed by private insurance companies. Those firms have profit incentives to pick the efficient structure of distribution and reimbursement levels, ceilings on total reimbursement, and 19
incentives to encour3ge both ph3rmacists and consumers to select the lowest-cost drug products.3o IV. PHARMACY PARTICIPATION Each of the proposed multisource reimbursement proposals will likely have different effects on pharmacy participation rates unless the average reimbursement level for ~vledicaid prescriptions dispensed were identical in each. 31 As previously observed, HCFA has noted the complaints of some pharmacists that they are unable to acquire MAC drugs at or below the MAC limit. In a recently-released study conducted for HCFA, _the revised MAC proposal is estimated to result in the highest average per-prescription reimbursement level, followed by PhIP and CIP. 3o Yet, there is no evidence that HCFA has considered the effect of the reimbursement level on the pharmacy participation rate in setting the rates at which pharmacies will be paid under each of the three proposals. 30 However, subsidies to employer-financed schemes provided by the tax system may encourage excessive insurance coverage. 31 This assumes that each proposal provides an equal incentive for pharmacists to dispense lower-cost generic products. 30 Professional Management Associates, Interim Analvsis of the Medicaid Reimbursement Policies (September 4, 1986), Tables 2, 3, and 12. We note that among other difficulties, the definition of multisource drug categories in the report is different from that described in the Notice. Further, while the reported reimbursement levels for revised MAC and PhIP may be reliable indicators for analysis of pharmacy participation, that for CIP may not. Unlike PhIP or MAC that establish a single reimbursement level for all pharmacies, the reported reimbursement levels for CIP reflects pharmacy-spc::;ific prices as well as the effect of the 125 percent screen that determines the maximum reimbursement level. Thus, the average per- prescription reimbursement level for CIP includes drug products whose retail prices are less than the screen as well as those whose prices are at or above the screen. For assessing pharmacy participation, it is only this maximum CIP level (the screen level) tha: is relevant. 20
Because, in principle, any desired reimbursement le\:::; can be attained under any of the three alternatives,31 the reimburseme:;, level. and the participation rate implied by that level, should not be used as a basis for choosing one proposal rather than another. Rather. the choi:e of reimbursement mechanism should be made on other grounds, such as the plan's effect on economic efficiency and its administrative costs. After the plan is selected, attention should then be directed to selecting the reimbursement level that will induce the most efficient number and types of pharmacies to participate in the program. 32 In considering the efficient level of pharmacy parti~ipation, we note that designing a system of Medicaid drug distribution that includes most operating pharmacies may result in excessively high reimbursement costs. 31 The choice of the MAC limit for each drug category (plus the estimated dispensing fee) in the revised MAC program will determine that scheme's reimbursement level. The percentage and dollar multiples of the Red Book's or Blue Book's lowest cost generic product in each drug category (plus the estimated dispensing fee) will determine PhIP's reimbursement level. The 125 percent screen will similarly establish CIP's maximum reimbursement level. We also note that the Notice proposes that the PhIP ceiling (excluding dispensing fee) be set at 150 percent of the lowest published wholesale list price, but that the ceiling reimbursement (excluding dispensing fee) be no less than $1.50 and no more than $4.00 above that lowest price. This approach seems more arbitrary than necessary. HCFA might consider a somewhat less arbitrary mechanism that preserves the central principle of the plan -- tying the reimbursement to a low-ranked wholesale price -- but is simpler: choosing the third lowest (or the median) price as the PhIP level. An advantage would be the elimination of need for minimum and maximum dollar incentives and the percentage multiple. Their elimination would remove two problems. First, since prescription prices will change along with the level of prices in general, any minimum and maximum dol~ar figures would have to be inflation-adjusted over time. Second, the specification of any dollar minimum or maximum incentive or a percentage multiple might for some drugs be either insufficient to assure availability of low cost products or much more than necessary to assure their availability. 32 Thus HCFA can adjust the details in each of the three schemes to attain any desired level of savings in government reimbursement costs. 21
For the same drug dispensed in any giycn dosage form. the price nriation among drug stores In any given geographic area is usuJ.lly substantia1. 33 Further. for each pharmacy participating In the !",ledicaid program. there may be a fixed administrative cost borne by HCFA. Thus. the higher HCFA's reimbursement level for prescription drugs dispensed to \1edicaid patients. the greater will be the number of p:lrticipating pharmacies of any given quality (cost) and the higher will be the government's reimbursement and ad mi n istra ti ve costs. In choosing the number and quality of participating pharmacies, HCFA must also consider the accessibility of these pharmacies to Medicaid customers. The lower the number of participating pharmacies, the less accessible participating pharmacies will be to Medicaid customers. The optimum distribution system is one that just balances the additional government reimbursement costs of increasing the number and type of participating pharmacies with the additional benefits of increasing Medicaid customers' access to participating pharmacies. We do not have sufficient information to conduct this balancing. Without knowing how various classes of pharmacies will decrease their participation in response to a lower reimbursement level and how those decreases affect accessibility to Medicaid consumers, we cannot provide HCFA with even a cursory discussion of each proposal's eff~cts on pharmacy participation. 33 Formula (Austin), See D. Kreling, Developing A Prescription DruQ R::imbursemcnt For Texas, unpublished Ph.D. Dissertation (University of Texas 1984). 22
V. ADMI?,:ISTRATIVE COSTS All thrce propos::J.Is cnt3iJ subst3nti31 costs of 3c::1inistr3tion. :\1] require pharm3cists to file c13ims and states to review a:'.j p3y thcm. All require an31ysis of d3t3 to set 3ccept3ble reimbursement Ic\ ~ls. As compared to the current MAC program, the re .. ioed MAC propos31 envisions a streamlined "notice and comment" procedure by which HCFA would determine MAC limits for multisource drugs covered by the reimbursement scheme. Nonetheless, HCFA staff would sti;1 have to monitor FDA therapeutic evaluations, prepare notices for the Fec~ral Register. and evaluate comments. Private firms would incur costs in responding to the request for comments for setting the initial MAC limit and for cha nges in those limi ts. HCFA's availability survey and the states' dispensing fee surveys would be retained. HCFA would continue to pur:hase and analyze invoice cost data in order to determine the MAC reimbusement level for each drug category. Further, HCFA proposes to set regional MAC limits to insure availability of multisource drugs to pharrn:?:ists, an added administrative burden. Finally, the states would still be required to set the EAC for each product and the dispensing fee. This rrocess promises to be expensive, but we have no data on what the actual administrative costs might be or how they might compare with current costs. As in the current and revised MAC, the PhIP propcsal would require periodic surveys by the states of pharmacists' dispensing costs,34 as well as 34 Actually, the Notice seems to suggest that these surveys would be continued even under CIP. We can see no usefulness of dispensing cost surveys if CIP is adopted. 23
the EAC for each product. 35 PhIP would also require ::.:: analysis of list price data for multisource drugs. Because the data ar~ :::.w computerized and updated monthly by the publishers. and the prograr:::::ing required for determining any reimbursement level tied to a low-rank::: price as well as changes in that level is simple, the costs of this pr::edure would be moderate. The administrative costs of PhIP may be subsr::.::tiaIIy lower than those of the revised and current MAC. For a number of reasons, the administrative costs c:- the CIP proposal are more difficult to evaluate than those of the other ~roposed schemes. Unlike the current or revised MAC or PhIP, CIP doc:. not require an estimate of the EAC or the dispensing fee. Nor is an ::.vailability survey required. However, in order for the 125 percent screen to reflect actual retail prices, we presume that periodic surveys by states "'-ould be required, an added administrative burden. We also suggest that an additional monitoring and enf:rcement cost may have to be incurred with CIP. Any scheme that bases rei=:-ursement on the prices charged by individual pharmacists may create ::.n incentive for pharmacists to charge the government (i.e., Medicaid cusroc~rs) higher prices than other customers. To the extent that the 125 percer:: screen typically exceeds the price charged to retail customers, pharmaci::s will have an incentive to charge Medicaid consumers the screen price w::'ile charging non- Medicaid consumers a lower competitive price. First, pharcacists know who their Medicaid customers are. Second, Medicaid customers do not care what price is charged for the prescription since their copaymen:. when required, 35 not fall product's In the PhIP as in the current and revised MAC, ~~oducts which do into a multisource drug category ""ould be r:::mbursed at the EAC plus estimated dispensing costs. 24
is a fixed dollar amount. Thus, phJrmacists can charge \tcdicaid customers
infbted prices and the \kdiC3,id customers will haH no ir::cnti\'e to seck a
new pha rmacist. 36 Further, unless the screen \Vere defined In terms of
priv3te pay prices only, the screen itself might also rise.
The invitation to eng3ge In dual pricing would o.ifect all Medicaid
prescriptions. Were dual pricing to be unchecked, the added cost to the
Medicaid program could be substantial. Although HCFA would require that
the screen be determined by the prices paid by non-Medicaid customers in
each st3te, HCFA might find it cost-effective to audit the \fedicaid and non-
Medicaid prices of at least some individual pharmacists. 37
In sum, while PhIP clearly has lower administrati\-e costs than the
revised MAC, a lack of data does not permit us to comp:l:e either PhIP or
the revised MAC to CIP.
VI. CONCLUSION.
Y,'c would urge HCF A to adopt a scheme that is designed to be
economically efficient. In this regard, we endorse HCFA's intention to
expand the number of drug categories subject to rnu]tisource drug
reimbursement. This will reduce or eliminate any inefficient use of brand-
name drugs that results from the limited coverage of the current MAC
36 A percentage copayment by Medicaid customers would restore some
of the consumer's incentive to search for lower prices and thus reduce the
likely extent of dual pricing.
31 Some pharmacies ("Medicaid mills") may evade the intetlt of such
an audit by restricting their clientele to Medicaid customers. These
pharmacies would then have no prices charged non-\fedicaid customers
against which the prices charged lvledicaid consumers could be compared.
One possible solution is the proposed 125 percent screen. While such a
screen will reduce the profitability and possibly the incidence of Medicaid
mills, we are unable to evaluate how effective a deterrent such a screen
might be. We do note that a screen will also likely redu:e the number of
pharmacies participating in Medicaid.
25
program. However, because each of the proposed alternatj'.es would provide strong disincentives to dispensing brand-names when a ge::eric drug product is available, and because of some uncertainty regarding t~e significance of current or potential non-therapeutic differences among drugs, we would urge HCFA to permit IV1edicaid consumers to purchase the brane-name products if they choose to pay the difference between the price of the brand name and the maximum reimbursement level for a generic drug produ:t. We would also suggest consideration of a percentage copayment by Medi:aid customers to provide them with an incentive to seek the lowest-cost drug ~vailable. We are unable to completely rank the proposals against the other goals of a reimbursement scheme. We would suggest that to facilitate such a ranking HCFA consider drawing a random sample of multisource and single- source drugs, and compare the estimated likely reimbursement levels and administrative costs, given the efficient selection of pharmacy participation. But we would also suggest that HCFA examine a variety of market-tested private insurance schemes to assess the means by which reimbursement levels are determined. There may be information available in the private sector regarding reimbursement program design that HCFA may find particularly useful in developing its Medicaid scheme. With respect to the efficient distribution of prescription drugs to Medicaid consumers, we would similarly suggest that an examination of market-tested private reimbursement schemes would be useful. One approach that could be employed with any of the three proposed schemes would rely on market responses to eliminate the arbitrary nature of the proposed reimbursement levels and simultaneously result in the lowest-cost distribution systems consistent with HCFA's mandate. HCFA could in effect auction off 26
the right for pharmacies to participate in the :-'1edicaid ;:>rogram. 38 First, HeFA (or the states) would have to determine the efficie::t number and the efficient quality of the Medicaid-drug distribution syste;n. Sv.:h qualit:-' aspects might include the distances of the ph:l.rmacies from !\1edicaid consumers, hours of operation, average waiting time. and the like. HCFA (or the states) might then conduct regional auctions based upon the selected reimbursement scheme (for example, PhIP).39 In each region, HCFA would then announce that Medic:lid drugs under PhIP would be reimbursed at the lowest-cost generic drug product in the Red Book or Blue Book minus, say, 10 percent. If the number and mix of pharmacies agreeing ro participate falls short of HCFA's goals, a second auction would be undertaken, by announcing, for example, that Medicaid reimbursement would be at the lowest-cost generic drug product minus, say, 5 percent. HCFA would continue to revise the announced reimbursement limits until the number and mix of participating pharmacies was efficient. This type of auction scheme is attractive because it eiiminates the need for arbitrarily establishing the upper limits of reimbursement. While we are unsure of the magnitude of the administrative costs ent::liled, the propos::l1 might require some monitoring to in~ure that in fact the quality of the services provided by the participating pharmacies is maintained. Further, under this scheme there would be no incentive to develop either Medicaid "mills" or dual pricing schemes. 38 It is our understanding that the Department of Justice will be proposing a variant of the auction scheme. While we are not aware of the precise details of the proposal and therefore cannot endorse the proposal, we believe this novel proposal merits consideration. 39 We use PhIP for illustrative purposes only. The described ::luction could be used in conjunction with any of the proposals. 27
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