State Efforts to Exclude 340B Drugs from Medicaid Managed ...

Department of Health and Human Services

OFFICE OF INSPECTOR GENERAL

STATE EFFORTS TO EXCLUDE 340B DRUGS FROM

MEDICAID MANAGED CARE REBATES

Suzanne Murrin Deputy Inspector General for Evaluation and Inspections

June 2016 OEI-05-14-00430

EXECUTIVE SUMMARY: STATE EFFORTS TO EXCLUDE 340B DRUGS FROM MEDICAID MANAGED CARE REBATES OEI-05-14-00430

WHY WE DID THIS STUDY

Manufacturer rebates for drugs paid through Medicaid managed care organizations (MCOs) are an increasingly important source of savings for both States and the Federal government. However, "duplicate discounts," which occur when manufacturers pay Medicaid rebates on drugs sold at the already-discounted 340B price, are prohibited by law. Thus, for States to collect allowable rebates only and avoid duplicate discounts for drugs paid through MCOs, they must identify and exclude 340B drug claims. If a State does not accurately identify 340B drug claims, both duplicate discounts and forgone rebates--that is, unclaimed rebates to which States are legally entitled--may occur. Duplicate discounts result in manufacturers paying too much in rebates, while forgone rebates result in States paying too much for drugs.

HOW WE DID THIS STUDY

We conducted structured interviews with States that pay for drugs through MCOs to determine how they identify 340B drug claims when collecting Medicaid rebates. We assessed States' methods and identified potential vulnerabilities that could inhibit correct rebate collection. We did not attempt to determine whether duplicate discounts for MCO drugs had occurred.

WHAT WE FOUND

We found that, to identify 340B drug claims and correctly collect rebates for MCO drugs, most States use methods that identify providers using 340B-purchased drugs. However, we found that these provider-level methods may not accurately identify all individual 340B drug claims, creating a risk of duplicate discounts and forgone rebates. By contrast, we found that methods that operate at the claim level can improve accuracy in identifying 340B drug claims, and thereby, help States correctly collect rebates.

WHAT WE RECOMMEND

We recommend that the Centers for Medicare & Medicaid Services (CMS) require States to use claim-level methods to identify 340B claims. CMS did not concur with our recommendation, noting that while it agrees with the importance of claim-level methods, the statute does not contemplate such a requirement for States. We continue to recommend that CMS require the use of claim-level methods to improve accuracy in identifying 340B claims and thereby reduce the risk of duplicate discounts and forgone rebates.

We also recommend that the Health Resources and Services Administration (HRSA) clarify its guidance on preventing duplicate discounts for MCO drugs to align with this new requirement. HRSA concurred with our recommendation.

TABLE OF CONTENTS

Objectives ....................................................................................................1 Background ..................................................................................................1 Methodology ................................................................................................7 Findings........................................................................................................8

Most States use provider-level methods to identify 340B claims for MCO drugs.......................................................................................8 Provider-level methods may not accurately identify all 340B claims, creating a risk of duplicate discounts and forgone rebates ............................................................................................10 Claim-level methods can improve accuracy in identifying 340B claims .............................................................................................13 Conclusion and Recommendations............................................................16 Agency Comments and Office of Inspector General Response.....18 Appendices .................................................................................................19 A: Descriptions of Methods to Identify 340B Claims and Prevent Duplicate Discounts .......................................................................19 B: HRSA and CMS Policies Related to Duplicate Discounts for MCO Drugs....................................................................................21 C: Detailed Methodology..............................................................23 D: State-Specific Methods to Identify 340B Claims and Prevent Duplicate Discounts for MCO Drugs ............................................25 E: Agency Comments ...................................................................27 Acknowledgments......................................................................................31

OBJECTIVES

1. To describe States' methods for identifying claims for 340B-purchased drugs paid through Medicaid managed care organizations (MCOs).

2. To identify potential vulnerabilities in States' methods for correctly collecting rebates and preventing duplicate discounts for drugs paid through MCOs.

BACKGROUND

Manufacturer rebates for drugs paid through MCOs are an increasingly important source of savings for both States and the Federal government. From 2011 to 2014, the proportion of States paying for prescription drugs through MCOs rose from under one-quarter to over two-thirds.1 As more Medicaid drugs are paid through MCOs, the financial impact of States' collection of rebates for those drugs--or failure to collect such rebates-- becomes increasingly significant.

States' methods for identifying claims for drugs purchased under the 340B Program have both direct and indirect effects on rebate collection. The 340B Program allows certain health care providers to purchase drugs at a discount. Duplicate discounts, which occur when manufacturers sell drugs at the discounted 340B price and later pay Medicaid rebates on the same drugs, are prohibited by law. To collect rebates correctly and prevent duplicate discounts, States must identify and exclude claims representing 340B-purchased drugs. If States' methods do not accurately identify 340B claims, however, States may end up forgoing rebates to which they are legally entitled. Moreover, manufacturer concerns about the effectiveness of States' methods to prevent duplicate discounts can contribute to rebate disputes, as demonstrated in previous OIG work.2 Such disputes may impede or delay rebate payments, and require States to expend scarce resources to resolve them.

This study was conducted in response to a Congressional request.

Medicaid Prescription Drug Coverage All 50 States and the District of Columbia (hereinafter referred to as States) offer prescription drug coverage as part of their Medicaid benefit packages. Medicaid reimbursement for covered outpatient drugs totaled

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1 Office of Inspector General (OIG), States' Collection of Rebates for Drugs Paid Through Medicaid Managed Care Organizations Has Improved, OEI-05-14-00431, September 2015, p. 1. 2 OIG, Medicaid Drug Rebate Dispute Resolution Could Be Improved, OEI-05-11-00580, August 2014.

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approximately $42 billion in 2014.3, 4 Covered outpatient drugs include drugs dispensed directly to patients at pharmacies (pharmacy drugs) and drugs administered by physicians or other medical practitioners to patients (physician-administered drugs).

States use two primary models to pay for drugs: fee-for-service (FFS) and MCOs. Under the FFS model, pharmacies and providers submit reimbursement claims for drugs directly to the State, and the State pays pharmacies and providers for those claims. Under the MCO model, States prospectively pay MCOs a fixed monthly amount for each Medicaid beneficiary, regardless of whether a beneficiary receives services during the month. Pharmacies and providers submit drug claims to MCOs under the MCO model. States may choose to use more than one payment model. For example, a State might pay for pharmacy drugs under the FFS model but pay for physician-administered drugs under the MCO model.

The Medicaid Drug Rebate Program The Omnibus Budget Reconciliation Act of 1990 established the Medicaid Drug Rebate Program.5 The program requires that, for covered outpatient drugs (hereinafter referred to as drugs) to be eligible for Federal financial participation through Medicaid, manufacturers must pay rebates to States on these drugs when dispensed to Medicaid beneficiaries and paid for by Medicaid.6 States essentially share a portion of these rebates with the Federal government.7

In 2010, the Affordable Care Act (ACA) expanded the Medicaid Drug Rebate Program to require payment of rebates for MCO drugs.8 Prior to ACA, only FFS drugs were subject to rebates under the Medicaid Drug Rebate Program.

To collect rebates, States determine the amount of rebates owed to them for each quarter and send invoices to manufacturers. First, States determine the total number of units of each drug paid by Medicaid in the quarter. For FFS drugs, States calculate units from drug claims

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3 The term "covered outpatient drug" is defined at 42 U.S.C. ? 1396r-8(k)(2). 4 OIG analysis of data from the Centers for Medicare and Medicaid Services' (CMS) Medicaid Budget and Expenditure System (MBES) and Medicaid State drug utilization data, September 2015. We combined Medicaid fee-for-service expenditures from MBES and MCO expenditures from Medicaid State drug utilization data. This amount does not reflect rebates. 5 The Omnibus Budget Reconciliation Act of 1990, P.L. 101-508, ? 4401; 42 U.S.C. ? 1396r-8. 6 42 U.S.C. ?? 1396r-8(a)(1) and 1396r-8(b)(1). 7 42 U.S.C. ? 1396r-8(b)(1). 8 ACA, P.L. 111-148 ? 2501(c); 42 U.S.C. ? 1396b(m)(2) and 42 U.S.C. ? 1396r-8(b)(1).

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reimbursed directly by the State. For MCO drugs, States calculate units from drug claims data provided by their MCOs.9 States then multiply the total number of units of each drug by the drug's unit rebate amount to determine the total quarterly amount of rebates owed.10 Finally, States send invoices to manufacturers reflecting the total quarterly amount of rebates owed for the manufacturers' drugs.

When a manufacturer, in good faith, believes that a State's rebate invoice for a given drug is based on erroneous utilization data, the manufacturer may dispute the invoiced amount for that drug.11 Once a manufacturer initiates a dispute, it can withhold payment to States for the disputed invoiced amount.

The 340B Drug Pricing Program The Veterans Health Care Act of 1992 established the 340B Drug Pricing Program.12 The 340B Program requires that, for drugs to be eligible for Federal financial participation through Medicaid, manufacturers must provide discounts on such drugs to certain eligible health care providers, known as covered entities.13, 14 To participate, covered entities must register with HRSA, the agency responsible for administering the 340B Program. Covered entities generally bill their patients' insurance-- including Medicaid, if applicable--for 340B-purchased drugs that they dispense or administer.

340B-purchased drugs for Medicaid patients. Covered entities may decide to use either 340B-purchased drugs or non-340B-purchased drugs

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9 We refer to data on drug claims reimbursed directly by the State (for FFS drugs) or by MCOs (for MCO drugs) as drug utilization data. 10 CMS uses drug pricing data provided by manufacturers to calculate the unit rebate amount for each drug according to a statutory formula. See 42 U.S.C. ? 1396r-8(c). 11 CMS, Sample Drug Rebate Agreement, ? V(b). Accessed at

Medicaid-CHIP-Program-Information/By-Topics/Benefits/Prescription-Drugs/

Downloads/SampleRebateAgreement.pdf on October 27, 2015. 12 Veterans Health Care Act of 1992, P.L. 102-585 ? 602; Public Health Service Act ? 340B; 42 U.S.C. ? 256b. 13 42 U.S.C. ? 1396r-8(a)(1), 42 U.S.C. ? 1396r-8(a)(5), and 42 U.S.C. ? 256b(a)(1). 14 42 U.S.C. ? 256b(a)(4) enumerates the complete list of the types of entities eligible to become covered entities.

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for their Medicaid patients.15, 16 Covered entities might make the same decision for all of their Medicaid patients, or make different decisions for their FFS Medicaid patients and their MCO Medicaid patients.

Contract pharmacy arrangements. Covered entities may contract with one or more pharmacies, known as contract pharmacies, to dispense 340B-purchased drugs on their behalf.17 Most contract pharmacies are retail pharmacies that serve the general public as well as patients of the covered entity or entities with which they contract. Contract pharmacies generally bill patients' insurance--including Medicaid, if applicable--on behalf of the covered entity for 340B-purchased drugs dispensed to its patients.

Duplicate Discounts Duplicate discounts occur when manufacturers sell drugs at a discount under the 340B Program and later pay Medicaid rebates on the same drugs. Duplicate discounts are prohibited by law for both FFS drugs and MCO drugs.18 Figure 1 shows how duplicate discounts could occur in the Medicaid rebate process.

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15 The decision to use 340B-purchased drugs for Medicaid patients is often referred to as "carving in," whereas the decision to use non-340B-purchased drugs for Medicaid patients is referred to as "carving out." Covered entities may decide to use non-340B-purchased drugs for their Medicaid patients because payment rates make doing so more financially advantageous. State laws and/or billing rules may restrict covered entities' ability to make this decision. 16 See, e.g., 65 Fed. Reg. 13983, 13984 (March 15, 2000). That guidance applies to FFS drugs because it was developed before the ACA expanded the Medicaid Drug Rebate Program to include MCO drugs. However, HRSA has proposed new guidance that would extend this policy to MCO drugs. See 80 Fed. Reg. 52300, 52309 (August 28, 2015). 17 See, e.g., 75 Fed. Reg. 10272 (March 5, 2010). Covered entities are permitted to use multiple contract pharmacy arrangements as long as they comply with applicable guidance. Id. at 10277-10278. 18 42 U.S.C. ? 256b(a)(5)(A)(i) and 42 U.S.C. ? 1396r-8(j)(1).

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Figure 1: How Duplicate Discounts Could Occur in the Medicaid Drug Rebate Process

MCO 340B Claims

Covered Entity

Discount 1: Drugs Sold at Reduced 340B

Price

MCO

MCO Utilization Data (Includes 340B Claims)

FFS 340B Claims

State

Rebate Invoice (Mistakenly

Includes 340B Claims)

Manufacturer

Discount 2: Rebates for 340B-Purchased

Drugs

States play a key logistical role in preventing duplicate discounts because they invoice manufacturers for rebates. To collect rebates correctly and prevent duplicate discounts, States must ensure that FFS and MCO utilization data used to invoice manufacturers do not include claims representing 340B-purchased drugs (hereinafter referred to as 340B claims). In general, States do so by identifying 340B claims in utilization data and excluding them before compiling rebate invoices.

Methods for identifying 340B claims. A number of different methods are available to States for identifying 340B claims and preventing duplicate discounts, but they generally correspond to one of two types:

Provider-level methods, which identify covered entities that use 340B-purchased drugs for their Medicaid patients and exclude drug claims billed by those entities from utilization data. The most prominent provider-level method is HRSA's Medicaid Exclusion File (MEF).

Claim-level methods, which exclude individual drug claims that covered entities have explicitly identified as 340B claims from utilization data.

See Appendix A for detailed descriptions of methods to identify 340B claims and prevent duplicate discounts.

Federal policies on duplicate discounts for MCO drugs. Because duplicate discounts for MCO drugs are relevant to the 340B Program and the Medicaid Drug Rebate Program, both HRSA and CMS have been involved in developing Federal policies on the topic. HRSA provides

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