WASHINGTON, Dec. 17 — The Bush administration on Monday will propose sweeping reductions in payments to pharmacies as a way to save money for Medicaid, the health program for more than 50 million low-income people.
The goal is to ensure that Medicaid can get drug discounts similar to those provided to large customers in the private market, including companies like Caremark Rx and Medco Health Solutions that manage drug benefits for people who have health insurance through an employer. Congressional investigators have found that Medicaid pays 35 percent more than the lowest price available in the private market for some commonly used brand-name drugs.
States, which share the cost of Medicaid with the federal government, make the final decision on what pharmacies are paid, subject to federal limits.
The proposed rule would provide new data for states to use in their calculations, redefining the “average manufacturer price” for brand-name and generic drugs.
Consumers would not be directly affected by the proposed changes. But federal officials said they hoped consumers would press for lower drug prices after checking the price list, which will be posted on a Web site.
S. Lawrence Kocot, a senior adviser to the administrator at the Centers for Medicare and Medicaid Services, said the proposed rule would carry out provisions of a law, the Deficit Reduction Act, signed by President Bush on Feb. 8.
The law, and the proposed rule, would also limit payments to state Medicaid agencies for the aggregate costs of prescription drugs when a generic substitute is available.
Federal officials said the rule would save $8.4 billion over the next five years. That represents a 5.6 percent reduction in total projected Medicaid spending on prescription drugs in those years. The administration estimates that the federal government would save $4.9 billion, and the states would save $3.5 billion, if the proposed rule is adopted.
In a document analyzing the proposals, the Department of Health and Human Services estimates that more than 90 percent of the savings would come from pharmacies. The rest would come from drug companies, which would, for example, be required to give price concessions on certain drugs administered in doctors’ offices.
The administration said the rule could reduce revenues for many of the nation’s 18,000 small retail pharmacies. The administration also said it had no way to measure that impact precisely, though it acknowledged the reductions could fall particularly hard on “those in low-income areas where there are high concentrations of Medicaid beneficiaries.”
Officials said that pharmacies could “mitigate the effects” of the lost revenue by buying lower-cost drugs. This assumes that pharmacies can find another source of supply: generic drug companies willing to lower their prices below the new federal limits.
The public will have 60 days to comment on the proposals. The government will weigh the comments and then issue a final rule with the force of law.
Bruce T. Roberts, executive vice president of the National Community Pharmacists Association, a trade group, said, “The proposed rule would have the perverse effect of discouraging the use of generic drugs.”
“The new limits on Medicaid reimbursement will be way below what drugstores typically pay for those drugs,” Mr. Roberts said.
Under a 1990 law, drug manufacturers must give discounts to states that buy their drugs for poor people who receive Medicaid benefits. The discounts take the form of rebates, which are paid by drug companies every time their pills are dispensed to a Medicaid beneficiary.
For a generic drug, the rebate is 11 percent of the average price paid to the manufacturer — the average manufacturer price. For a brand-name drug, the basic rebate is at least 15.1 percent of the average price, and it may be more because Medicaid is supposed to have access to the “best price” paid by any other buyer, with some exceptions.
Each drug company calculates how much it owes Medicaid for each of its drugs.
The Government Accountability Office, an investigative arm of Congress, said that manufacturers calculated prices and rebates in very different ways because they had not received “clear guidance” from the federal government. Moreover, it said, federal Medicaid officials rarely check the accuracy of these calculations.
In the proposed rule, the Bush administration takes steps to ensure that Medicaid gets the best price available to any buyer. In determining the best price, it says, manufacturers must offer the government the benefit of any “rebates, discounts or other price concessions” given to the pharmacy benefit managers like Caremark Rx and Medco Health Solutions.
Drug makers routinely pay rebates to pharmacy benefit managers as a reward for increasing the use of their products.
The proposed definition of best price also includes prices for drugs sold to mail-order pharmacies.
Purchases by mail-order houses and pharmacy benefit managers account for a large share of all sales, and “they reflect the realities of today’s marketplace for consumers of prescription drugs,” the rule says.
