Management Issue 3: Appropriateness of Medicaid and SCHIP Payments
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Medicaid is a joint Federal and State program that provides medical assistance to an estimated 50 million low income and disabled Americans. The Federal share of the Medicaid and State Children’s Health Insurance Program (SCHIP) expenditures in FY 2006 was approximately $185 billion. Because Medicaid and SCHIP are Federal/State matching programs, improper payments by States lead to corresponding improper Federal payments. Identifying payment errors and their causes in the Medicaid and SCHIP programs is particularly difficult because of the diversity of State programs and the variation in their administrative and control systems.
Payment Error Rates
Until recently, little was known about payment error rates in the Medicaid and SCHIP programs. This lack of information represented a substantial vulnerability in preventing fraud, waste, and abuse. In July 2001, CMS invited States to participate in a demonstration project to develop a Payment Accuracy Measurement (PAM) methodology for Medicaid, i.e., a single methodology that can produce both State-specific and national-level payment error estimates. The PAM model was later modified to comply with the requirements of the Improper Payments Information Act of 2002 which requires heads of Federal agencies to estimate improper payments for the programs they oversee, report to Congress annually, and submit reports on actions the agencies are taking to reduce such payments.
The PAM project has since been renamed the Payment Error Rate Measurement (PERM) program and was published in late August 2006 as an interim final rule with comment. The PERM includes the error rate processes for Medicaid and SCHIP—fee-for-service, managed care, and eligibility. CMS is using a national contracting strategy to produce Medicaid and SCHIP managed care and fee-for-service error rates. The PERM also sets forth the State requirements for conducting reviews and estimating payment error rates due to errors in eligibility determinations.
To assist CMS with its development of PERM and at the request of the Office of Management and Budget (OMB), OIG conducted audits of Medicaid and SCHIP eligibility in three States: New York, California, and Florida. These reviews found significant eligibility errors in these programs. For the 6-month period ending June 30, 2006, approximately $363 million (Federal share) in Medicaid payments and $67.2 million (Federal share) in SCHIP payments were made on behalf of beneficiaries who did not meet Federal and State eligibility requirements in these three States. For the majority of these Medicaid and SCHIP improper payments, beneficiaries were ineligible because household incomes exceeded the threshold on the dates of service, citizenship requirements were not being met, Social Security numbers were lacking, and spend-down requirements were not being complied with.
OIG also conducts targeted program reviews to identify vulnerabilities and inappropriate payments associated with specific types of services. For example, in a 2007 report, OIG assessed the appropriateness of Medicaid payments for pediatric dental services in five States and found that 31 percent of Medicaid pediatric dental services provided in those States during 2003 did not meet State and Federal requirements, resulting in improper payments of approximately $155 million (Federal share $96 million). OIG recommended that CMS increase efforts to ensure that States enforce existing policies relating to the proper documentation of pediatric dental services and provide assistance to States to promote provider compliance with documentation requirements.
In addition, ongoing and planned work includes various reviews to identify payment error vulnerabilities in the Medicaid managed care program, to determine whether children enrolled in separate SCHIPs should be enrolled in Medicaid, and identify potential inappropriate payments for durable medical equipment. OIG is also conducting reviews to oversee the Medicaid and SCHIP error rate determination process.
Medicaid Prescription Drugs
CMS estimates that Medicaid expenditures for prescription drugs in 2006 totaled more than $28 billion. Although Medicaid drug expenditures declined significantly in 2006 because of the shift of the expenditures for dual eligibles to the new Medicare Part D program, drug spending continues to represent significant Medicaid expenditures.
States have substantial discretion in setting reimbursement rates for drugs covered under Medicaid. In general, Federal regulations require that each State’s reimbursement for a drug not exceed the lower of the estimated acquisition cost plus a reasonable dispensing fee or the provider’s usual and customary charge for the drug. In addition, CMS sets Federal upper limits (FUL) and many States have maximum allowable cost limits for multiple source drugs (drugs with generic equivalents) that meet specific criteria.
Although States must reasonably reimburse pharmacies for prescription drugs provided to Medicaid beneficiaries, but they often lack access to pharmacies’ actual purchase prices. Because of this lack of pricing data, States rely on estimates to determine Medicaid reimbursement. Most States base their calculations of estimated acquisition costs on average wholesale prices (AWP), which are published prices that States obtain through national drug pricing compendia. AWPs are not defined by law or regulation and are not necessarily based on actual sales transactions.
OIG has produced a body of work related to Medicaid’s pharmacy reimbursement and has consistently recommended that Medicaid programs reimburse pharmacies for drugs based on prices that more accurately reflect pharmacies’ acquisition costs. Earlier OIG reports demonstrated that the published AWPs used to determine Medicaid drug reimbursement amounts generally did not reflect the prices incurred by retail pharmacies.
The DRA impacts both Medicaid prescription drug reimbursement to pharmacies and the rebates that manufacturers are required to pay to State Medicaid programs. It changes the basis for establishing the FUL amounts from the lowest published price (e.g. the AWP or WAC) to the lowest average manufacturer price (AMP). The DRA also requires CMS to make AMPs available to State Medicaid programs on a monthly basis. With respect to Medicaid rebates, the DRA also addresses issues related to rebates on clarifying the AMP, including physician-administered drugs and the treatment of authorized generics.
OIG is continuing to address pricing of Medicaid drugs. In 2007, OIG issued a report comparing the FUL amounts based on the new formula to estimates of pharmacies’ acquisition costs. OIG found that under the new calculation method established by the DRA, FUL amounts are likely to decrease substantially, as intended, but OIG has concerns that, at least initially, some of the new FUL amounts may be below pharmacy acquisition costs. OIG recommended that CMS take steps to identify when a new FUL amount may not be representative of a drug’s acquisition cost to pharmacies.
In addition to identifying problems with pharmacy reimbursement, OIG is also concerned that State Medicaid programs may not be receiving the proper amount of drug rebates that they are entitled to receive from drug manufacturers. The statutory drug rebate program, which became effective in January 1991, requires drug manufacturers to pay rebates to State Medicaid programs. Medicaid rebates are based on a formula that includes the reported AMPs. However, OIG has found that manufacturers may not always report AMPs in a timely manner or, in some cases, may not report them at all. Further, in a 2006 report mandated by the DRA, OIG found that manufacturers make inconsistent interpretations regarding how to calculate the reported AMPs. OIG has recommended that CMS work to ensure that manufacturers provide accurate and timely AMP data and provide additional clarification on how to determine reported AMPs.
OIG has also found instances in which pharmaceutical manufacturers have defrauded the Medicaid drug rebate program. For example, in 2005, the United States entered into a civil settlement with King Pharmaceuticals, Inc., for more than $124 million to resolve allegations that King improperly calculated its Medicaid rebate pricing information and underpaid rebates due to the States’ Medicaid programs. Several other major drug manufacturers have entered settlements with the United States in which Medicaid drug rebate violations were one of several issues resolved.
Additionally, OIG has investigated a number of cases involving retail pharmacy chains that allegedly billed Medicaid for prescription drugs that were not provided to beneficiaries. OIG and its law enforcement partners also have pursued cases in which pharmacies switched the drugs prescribed to patients to exploit Medicaid reimbursement rules. For instance, in November 2006, the Government entered into a $49.5 million settlement with Omnicare, Inc., a nationwide institutional pharmacy that serves nursing home patients exclusively. The investigation found that Omnicare switched generic Zantac tablets with capsules to avoid a FUL set by CMS and the maximum allowable cost set by State Medicaid programs for the tablets. By these and other drug switches, Omnicare gained additional Federal and State dollars to which it was not otherwise entitled.
Given the high Federal and State expenditures and the potential for significant savings, CMS should continue to be attentive in its oversight of Medicaid reimbursement for prescription drugs and the Medicaid drug rebate program. In particular, CMS should work to ensure that the cost-saving provisions in the Deficit Reduction Act (DRA) are effectively implemented and monitored. Further, States need accurate data that reliably reflect the actual costs of drugs paid by pharmacies and are based on pricing data that can be validated. Therefore it is essential that all manufacturers report timely and accurate data to CMS to ensure appropriate payments are made and correct rebates are collected.
Payment Error Rates
The FY 2006 CMS “Performance and Accountability Report” (PAR) included the results of the PERM pilot. The FY 2007 report will include a preliminary national Medicaid fee-for-service error rate based on a sample of States and of claims within those States for the first two quarters of FY 2006. The final national Medicaid fee-for-service error rate for FY 2006 will be reported in the FY 2008 PAR, as will the national Medicaid and SCHIP fee-for-service, managed care and eligibility error rates for FY 2007. CMS expects to be fully compliant with the Improper Payments Information Act requirements by FY 2008.
In response to OIG audits of Medicaid and SCHIP eligibility in New York, California, and Florida, the States generally agreed to improve their eligibility processes. The payments made on behalf of ineligible beneficiaries will be adjudicated by CMS as part of its audit clearance process. Additionally, in response to OIG’s 2007 review of claims for Medicaid pediatric dental services, CMS indicated that its Medicaid Integrity Group plans to work with States to enforce existing policies related to the proper documentation for pediatric dental services as well as other Medicaid services.
Medicaid Prescription Drugs
CMS has been directed by section 6001(f) of the DRA to conduct a monthly survey of retail prices for prescription drugs. This information is to be provided to the States monthly and compared to State payment rates annually. CMS currently provides AMP data to State Medicaid agencies as mandated by the DRA.
On July 17, 2007, CMS published in the Federal Register a final rule with comment period (72 FR 39142) that (1) implements the provisions of the DRA pertaining to prescription drugs under the Medicaid program, (2) adds to existing regulations Medicaid rebate policies, and (3) solicits public comments on the FUL outlier and AMP sections of the rule. In accordance with the DRA, the rule includes requirements related to State plans, Federal financial participation for drugs, and the payment for covered outpatient drugs under Medicaid.
In the final rule, CMS describes an outlier policy that precludes the lowest AMP from being used in the FUL calculation. In the notice of proposed rulemaking, CMS proposed excluding lowest AMPs that were 70 percent less than the second-lowest AMP. In the final rule, this threshold was decreased to 60 percent of the lowest AMP (the same threshold as in the OIG report). In those cases in which the lowest AMP is determined to be an outlier, the second lowest AMP will be used in the FUL calculations. CMS stated that this level will ensure that at least two drugs have AMPs at or below the FUL amount.
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