Normal Limits

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"In practical medicine the facts are far too few for them to enter into the calculus of probabilities... in applied medicine we are always concerned with the individual" -- S. D. Poisson

November 30, 2005

GAO - Medicaid: States� Payments for Outpatient Prescription Drugs

A Government Accountability Office report to Congressman Edward Whitfield, the vice chair of the House Subcommittee on Oversight and Investigations of the Committee on Energy and Commerce. This report was initiated to investigate the rising costs of Medicare to cover outpatient mediations.


Five states were studied: Mississippi, Montana, Pennsylvania, South Carolina,
and Utah.

For each drug covered, each state�s payment per unit was calculated as first taking
the lowest of:

  • The state�s estimate of drug acquisition cost

  • The pharmacy�s usual and customary charge

  • The federal upper limit (FUL, if available. The CMS is required by Federal regulations to set specific FULs for drugs that are provided by at least three suppliers.)

  • The state's maximum allowable cost (MAC, if available. Analogous to the FUL but set by individual states. As of December 2003, 38 states had established MACs for certain drugs at rates below the corresponding FUL or for drugs for which CMS had not set an FUL.)

...and dividing this minimum by the number of units dispensed to yield each state's payment per unit.

Note that dispensing fees are not included.

Each state's payment per unit (PPU) is compared against each of the 3 estimated market prices defined as:


Overall, minimal variation existed among the five states� payments for most drugs.

  • The five states� payments for 189 brand-name drugs varied less than 7 percent on average

  • The five states� payments for the 5 generic drugs we reviewed varied 30 percent on average.

The GAO found that Medicare in all 5 states pay higher prices than each of the 3 market prices:
On average, each state�s payments for brand-name drugs exceeded each market-based price by 10 percent or more. Additionally, states� average payments for brand-name drugs were 12 percent higher than AMP, 36 percent higher than Best Price, and 73 percent higher than FSS Price, on average.

The Centers for Medicare and Medicaid Services was given a chance to respond to the GAO:
CMS stated that this report makes it clear that the current payment rules result in overpayments for drugs and emphasizes the need for reform. CMS commented that payments should be determined using accurate acquisition cost data, which it said requires congressional action.

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