CSA
Summary
Read the report at California State Auditor ↗
Department of
Health Services:
Has Not Collected $40 Million in
Supplemental Rebates From
Drug Manufacturers
March 1996
95109R
Table of Contents
Summary S-1
Introduction 1
Chapter 1
The Department Has Not Collected
Approximately $40 Million in Supplemental
Rebates From Drug Manufacturers 5
Recommendations 11
Chapter 2
The Department Does Not Clearly
Document That Its Drug Reviews
Address Legal Requirements 13
Recommendations 17
Chapter 3
The Supplemental Rebate Program Has Not
Significantly Limited Accessibility to Drugs,
and Potential Revenue From the
Program Far Exceeds Program Costs 19
Appendix A
A History and Analysis of the Estimates of
Savings Related to the Medi-Cal
Drug Rebate Program 25
Appendix B
Medi-Cal Drug Rebate Program
Budget Estimates of Net Savings 31
Appendix C
The Medi-Cal List of Contract Drugs 33
Appendix D
Therapeutic Classifications of the 16 Drugs
Suspended From the List of Contract Drugs
as a Result of the 1994 Legislation 39
Appendix E
Therapeutic Classifications of the 17 Drugs
Added to the List of Contract Drugs
Between October 1994 and November 1995 41
Response to the Audit
Department of Health Services 43
California State Auditor’s Comments
on the Response by the
Department of Health Services 45
Summary
Evidence does not Results in Brief
clearly demonstrate
T
Auditth Hatig thhleig hts ... he Department of Health Services (department) has
department’s drug not collected approximately $40 million in
We froeuvniedw thsa atd: here to supplemental rebates owed to the State and the
criteria established federal government by drug manufacturers because it has
i$n4 0la mwi;l lion in not adequately administered the California Medical
supplemental Assistance Program (Medi-Cal) drug rebate program
Trehbea tseusp opwleemd eton ttahle (program). The department does not calculate and bill
rSetbataet ea npdro tghera fmed eral specific supplemental rebate amounts owed by
government have
has not limited manufacturers, and it has failed to monitor and track
not been collected;
accessibility to supplemental rebate payments and sanction manufacturers
drugs; and who do not remit the required amounts owed to the State
and the federal government. As a result, the State has not
Potential program received $20 million in supplemental rebates, and the
revenue of federal government has not received its $20 million share
approximately in supplemental rebates.
$70 million far
exceeds the The department prepares various types of documents
program’s related to its reviews of drugs to be added to the Medi-Cal
estimated $5 List of Contract Drugs (LCD). Although the department
million annual cost. has indicated that it follows the criteria stated in the Welfare
and Institutions Code when conducting its reviews, it does
not uniformly prepare and retain its documents in a manner
that clearly demonstrates that the criteria were the bases
for its decisions.
The 1994 legislation authorizing the supplemental rebate
program has not significantly reduced the availability of
drugs
to Medi-Cal recipients. Because some drug manufacturers
were unwilling to participate in the supplemental rebate
program, only 16 drugs were suspended from the LCD. In
addition, the administrative costs of the supplemental
rebate program are far exceeded by the potential revenue
from the program. The annual required costs to administer
the program are approximately $5 million, but the potential
revenue for fiscal year 1994-95 was approximately $70
million.
S-1
Recommendations
To properly administer the program, the department
should:
Collect all supplemental rebates owed by:
Calculating a specific dollar amount on the invoice
that the department sends to a manufacturer;
Monitoring the accuracy of payments;
Tracking manufacturers who have not paid; and
Sanctioning manufacturers for nonpayment or for
late or erroneous payments.
If needed, seek statutory authority to:
Use ingredient cost or another pricing base it
already possesses as the statutorily approved
pricing base if using the average manufacturer price
for billing is impractical;
Suspend drugs from the LCD that are produced by
manufacturers who do not pay the rebate; and
Charge interest on late payments.
Develop and retain standard evaluation documents
demonstrating that the department used the criteria
stated in the Welfare and Institutions Code, Section
14105.39(d), when it made its decision to add, not add,
remove, or retain drugs on the LCD.
Agency Comments
The department agrees that it has not received rebates
from a large number of drug manufacturers and indicated
that it intends to seek legislative authority to sanction drug
manufacturers who do not pay or consistently make late
payments. Although it is not convinced of the accuracy of
S-2
the supplemental rebates owed, the department states that
it is not in a position to specify a more accurate amount
because of deficiencies in its payment tracking system.
S-3
Introduction
Background
T
he Department of Health Services (department) is
responsible for administering the California Medical
Assistance Program (Medi-Cal). One of the
components of Medi-Cal is the Medi-Cal drug rebate
program (program). The primary objective of the program
is to obtain significant
price discounts on pharmaceuticals prescribed for Medi-Cal
beneficiaries. Discounts are in the form of manufacturer
rebates on drugs purchased through Medi-Cal. To
accomplish this, the Welfare and Institutions Code directs
the department to contract with manufacturers to provide
discount prices at least comparable to those they offer to
other high-volume purchasers of drugs. Another
significant objective of the program is to ensure that
Medi-Cal beneficiaries have access to appropriate drug
therapies and a comprehensive range of drug products.
Before the program was established, the list of drugs that
Medi-Cal would reimburse for could be changed only by
regulation. In July 1990, the Welfare and Institutions Code
established the Medi-Cal List of Contract Drugs (LCD) and
allowed the department to add drugs available to
beneficiaries through a negotiation process.
The program was established in July 1990 as the Medi-Cal
Drug Discount Program. (See Appendix A for a more
complete description of the history of the program.) Under
this
program, the department entered into contracts with
several drug manufacturers and achieved price reductions
based on the discount prices provided to other third-party
purchasers
of drugs. The discounts were in the form of rebates, or
equalization payment amounts as defined in
Section 14105.31 of the Welfare and Institutions Code, and
were based on the difference between the price that the
manufacturer charged to wholesalers and the
manufacturer’s “best price.” Best price is the negotiated
4
price, or the manufacturer’s lowest price available to any
other customer. Before implementing the drug discount
program, the department estimated savings of $50 million
for fiscal year 1990-91. The Office of the Auditor General
issued a report on the program in June 1991, which
concluded that the department did not achieve these
estimated savings.
In January 1991, the federal government implemented a
nationwide drug rebate program under the Omnibus
Budget Reconciliation Act of 1990. Under this federal
program, Section 1927 of the Social Security Act requires
drug manufacturers to submit quarterly rebates directly to
states, as described in the contract between the
manufacturer and the federal government. The Social
Security Act also required that the rebate be based on the
total number or units of a drug paid for under the state
Medicaid program and various pricing bases depending on
whether the drug was a single-source or generic drug.
In 1992, new state legislation was implemented that
significantly amended the policies of the program. This
new legislation allowed the department to expand the
current contracting activities to include those drug
manufacturers without state rebate contracts. The
legislation also allowed the department to aggressively
negotiate with drug manufacturers
to achieve the savings outlined in the Budget Act of 1992.
To achieve these savings, the department implemented the
provisions of the 1992 legislation in a manner that required
manufacturers to negotiate a higher rebate than the federal
rebate. If the manufacturer refused to negotiate a higher
rebate, the department could counter by removing the
manufacturer’s product line from the LCD.
The other legislative change required the department to
negotiate or renegotiate contracts to ensure that there are
as many single-source drugs within each therapeutic
category
of drugs as the department determined necessary to
meet the needs of the Medi-Cal population. The
department implemented the therapeutic category review
process to accomplish this requirement. This process
reviewed a specific category of drugs designed to address
a particular symptom or ailment rather than a single drug.
5
Legislation enacted in 1994 requires manufacturers to
submit
a supplemental rebate for all drugs subject to the federal
rebate. The supplemental rebate is 10 percent of the
average manufacturer’s price for all drugs paid through
Medi-Cal, except for specific drugs that are exempted by
state statutes.
The legislation allowed those manufacturers that had
already negotiated contracts with the department based on
the 1992 provisions to apply their existing negotiated
supplemental percentage against the mandated amount.
For example, if the manufacturer was already submitting a
negotiated supplemental rebate of 6 percent of average
manufacturer price, it would need to remit only an
additional 4 percent. However, if a manufacturer did not
sign a supplemental rebate contract, the legislation
required the department to make its drugs available only
through prior authorization. The supplemental rebate law
is scheduled to expire on June 30, 1996.
The existing program operates as follows. Providers,
usually pharmacists, request reimbursement from the State
for the
drugs they provide to Medi-Cal beneficiaries. The
department reimburses the providers at the lowest of four
predetermined pricing bases. The four bases are average
wholesale price less 5 percent, estimated acquisition cost,
federal allowable cost, and maximum allowable ingredient
cost. The department accumulates utilization data from
the Medi-Cal drug claims submitted by the providers. At
the end of each quarter, the department invoices the drug
manufacturers for the federal rebate and requests that they
submit the supplemental rebate.
The department’s Medi-Cal contracting section administers
the program. The department has budgeted 17 positions
for this section, including 8 pharmaceutical consultants.
According to a department summary, the main function of
the section is to develop policies regarding the scope of the
drugs and medical supplies available to Medi-Cal
beneficiaries. The contracting section also negotiates
contracts with manufacturers to obtain rebates and reviews
drug therapies and medical supplies to ensure that the
most cost-effective drugs and products are included on the
LCD and Medical Supplies List.
6
Scope and Methodology
The purpose of this audit was to determine whether the
program had realized any savings since fiscal year 1990-91
and to assess the accessibility of drugs to Medi-Cal
beneficiaries without prior authorization.
To determine whether the department used different
methodologies to estimate cost savings for different fiscal
years or for changes in the program, we interviewed
department staff members to obtain the department’s
current and previous methodologies for estimating savings.
We also evaluated how these methodologies affected the
department’s presentation of the savings that it reported to
the Legislature.
We ascertained the amounts of savings realized since
fiscal year 1990-91 and compared the results to the
department’s estimates. Specifically, we compared the
actual rebates collected with the department’s estimate of
collections by fiscal year. Because rebates are the only
portion of the department’s estimates of savings that are
measurable, we did not have any data to compare to the
department’s other estimates of savings.
The rebates pertaining to fiscal years 1990-91 through
1994-95 that the department collected through February
29, 1996, were based on data we obtained from the
department’s accounting records. We did not determine
the accuracy of all of this data; however, we corrected for
errors that came to our attention, such as supplemental
rebate collections recorded as federal rebate collections.
To determine the extent to which quantifiable offsetting
costs are included in the department’s cost-benefit analysis
of adding drugs to or deleting drugs from the LCD, we
interviewed department staff members to identify those
factors that
the department considers in its cost analyses of drugs
being reviewed and assessed the department’s level of
documentation used in these analyses.
We summarized the number of drugs added to and
suspended from the LCD between October 1994 and
November 1995, the first 14 months affected by the 1994
7
legislation, to ascertain whether the program resulted in a
greater or lesser selection of drugs available to Medi-Cal
beneficiaries without prior authorization.
To determine the total amount of state supplemental
rebates collected by the department, we reviewed the
department’s budget estimates and payment records for
supplemental rebates for fiscal year 1994-95, the first year
affected by the 1994 legislation. We also summarized the
total amount of supplemental rebates that the department
collected for fiscal years 1990-91 through 1993-94.
Because of the lack of complete supporting documentation,
we were unable to determine the number of instances in
which therapeutically equivalent or superior drugs as
compared to those drugs already on the LCD were rejected
in place of more or equally costly drugs already on the
LCD. However, we asked the department staff about the
process of evaluating drugs to be included on the LCD, and
we reviewed any documentation supporting its decisions to
add, not add, retain, or remove drugs from the LCD. In
addition, we determined the extent to which the department
added or retained drugs on
the LCD that represented the lowest net cost to the State.
8
Chapter 1
The Department Has Not Collected
Approximately $40 Million in Supplemental
Rebates From Drug Manufacturers
Chapter Summary
T
he Department of Health Services (department) has
not collected approximately $40 million in
supplemental rebates owed to the State by drug
manufacturers because it has not adequately administered
the Medi-Cal drug rebate program (program). The
department does not calculate and bill specific
supplemental rebate amounts owed by manufacturers.
Further, the department has failed to monitor and track
supplemental rebate payments and sanction manufacturers
who do not remit the required amounts owed to the State
and the federal government. As a result, the State and the
federal government do not receive all the rebates due from
manufacturers.
Supplemental Rebates Should
Generate Approximately $70 Million
The department calculated that the drug manufacturers
who have signed supplemental rebate contracts owe the
State approximately $70 million in supplemental rebates for
drugs reimbursed through Medi-Cal during fiscal year
1994-95. However, the department has only collected
approximately $30 million, or 43 percent of this total, as
seen in Table 1. Therefore, a total of approximately $40
million remains due to the State and the federal
government. Section 14105.335 of the Welfare and
Institutions Code defines the supplemental rebate as equal
to 10 percent of the average manufacturer’s price (AMP).
However, the department has not acquired the AMP data
and thus cannot bill manufacturers for exact amounts
owed.
9
Table 1
Comparison of Budget Estimates and Actual
Rebates for Supplemental and Federal Rebates Collected
Through February 1996
(in Millions)
Supplemental Federal Rebate
Rebate
Fiscal Years
Fiscal Year 1990-91
1994-95 Through
1994-95
Budget estimate $70 $ 757
Rebates collected
through 30 661
February 1996
Difference $40 $ 96
Percent of estimate
received 43% 87%
Note: Although the department has collected 87 percent of the $757 million
federal rebate budget estimate, it has collected only 81 percent of
the $818 million federal rebate amounts that were invoiced. The
department’s budget estimate is less than the invoiced amount
because the department reduces its budget estimate for invoices with
unresolved disputes.
Because the department has not acquired the AMP data, it
estimated the total amount of supplemental rebates that the
State was entitled to receive by calculating the adjusted
total ingredient cost of all outpatient drug claims paid during
calendar year 1994 and then multiplying this amount by
10 percent. The ingredient cost is the lowest of four
predetermined bases and represents the price paid by the
Ingredient costs can be State to providers. These bases, defined by the federal
used to estimate government and industry data, are average wholesale price
Medi-Cal drugs’ AMPs. less 5 percent, estimated acquisition cost, federal allowable
. cost, and maximum allowable ingredient cost. The
department adjusted the ingredient cost to approximately
80 percent to exclude drugs that were statutorily exempt
from rebates, to account for differences between the AMP
and ingredient cost pricing bases, and to account for the
net reduction in rebates resulting from those manufacturers
refusing to sign the supplemental rebate contracts.
According to the chief of the department’s Medi-Cal
10
contracting section (contracting section), the total
ingredient cost, as adjusted, is a reasonable substitute for
estimating supplemental rebate amounts that were owed.
To determine the relationship between AMP and ingredient
cost, we selected a sample of 127 drugs of manufacturers
who paid the supplemental rebate and who provided
supporting calculations for the amounts remitted. Based
on this information, we determined the AMP for these
drugs. After comparing the AMP to the ingredient cost of
each drug, we determined that, on average, the AMP
represents approximately 80 percent of the ingredient cost
of each drug. Considering that our estimate of the AMP as
a percentage of ingredient cost is consistent with the
department’s estimate of the AMP as a percentage of
adjusted ingredient cost, its rebate estimate of
approximately $70 million in supplemental rebates appears
reasonable. Therefore, the department has not collected
approximately $40 million in supplemental rebates owed to
the State and the federal government.
The Department Does Not Calculate
Individual Supplemental Rebates
The department does not calculate specific amounts due
from each manufacturer for supplemental rebates when it
prepares rebate invoices. Thus, the invoice that a
manufacturer receives
Invoices to does not specify how much money is owed under
manufacturers do not the supplemental rebate program. Section 14105.335 of
specify the dollar amount the Welfare and Institutions Code stipulates that the
owed for the department use the AMP as the pricing base for calculating
supplemental rebate. the supplemental rebate. The Welfare and Institutions
Code refers to AMP as
it is defined in the manufacturer’s rebate contract with the
federal Health Care Financing Administration (HCFA)
under Section 1927 of the Social Security Act (42 U.S.C.
1396r-8). Manufacturers will routinely submit AMP data for
their products to the HCFA. The HCFA uses the AMP
data to compute pricing data provided to the department for
the federal rebate. However, according to a HCFA
administrator we contacted, HCFA will not release AMP
data to the department
because HCFA believes that the information is confidential.
11
Because AMP data are unavailable from the federal
government, we would expect the department to invoice
manufacturers for specific amounts based on drug
utilization and AMP data it is required to use by the Welfare
and Institutions Code. For example, for the federal rebate,
the department has an electronic data processing system
that invoices a manufacturer for a specific amount based
on the drug utilization data it maintains and the federal
rebate pricing data it receives from the HCFA. In addition,
we would expect the State to require the drug manufacturer
to provide its AMP data to the department within 30 days
after the end of the quarterly rebate period just as the
federal government requires of manufacturers for the
federal rebate. Further, similar to the federal rebate
legislation, we would expect the State to implement
sanctions if this requirement is not met.
For the supplemental rebate program, we found that the
department did not prepare an invoice specifically for
the supplemental rebate that stated the drug utilization
data, the AMP, the contract identification number on which
the claim was based, or any penalties for nonpayment.
Instead, the department stated on the federal rebate
invoice that supplemental rebate amounts were not
included in the invoice total and instructed the
manufacturer to calculate and submit required
supplemental rebates along with the federal rebate
payment. In addition, the document instructed the
manufacturer to provide the department with the supporting
data needed to reconcile the amount of any supplemental
rebate being remitted. However, we found that most
of the manufacturers did not provide this information to
the department with their supplemental rebate payments.
The document sent to the manufacturer did not state AMP
data because the department did not require it from the
manufacturer and, according to the chief of the contracting
section, has been unable to acquire it from the HCFA.
According to the chief of the contracting section, the
legislation was written using AMP as the pricing base
because
the supplemental rebate was designed to be assessed on
the
amount of revenue that the manufacturer generated.
However, according to the chief, the department was fully
aware
12
that it would not receive the AMP data before invoicing
the manufacturers. Instead, the department believed that
the manufacturers would provide the data when they paid
the supplemental rebates.
Providing manufacturers with a specific amount due is
important for several reasons. A specific amount on an
Providing manufacturers
invoice generates a greater likelihood of payment. For
with specific amounts
example, the department specifies the amount due for the
owed generates a
federal rebate
greater likelihood of
and collects approximately 81 percent of amounts that are
payment.
owed. In addition, identifying specific amounts on the
invoice supports the department’s collection efforts and
allows for reconciliations of amounts received and due.
The Department Has Failed To Monitor
and Track Supplemental Rebate Payments
and Sanction Manufacturers
The department has failed to monitor and track
supplemental rebate payments owed by manufacturers and
has failed to sanction manufacturers who have not paid all
rebates owed. Because it has not identified specific
amounts owed by individual manufacturers and has not set
up a system for monitoring payments, the department
cannot determine whether amounts that are remitted are
accurate. Also, the department does not promptly post
payments to its records and does not track manufacturers
who failed to submit rebates. Finally, if the department
were to sanction manufacturers, it would assist them in
receiving prompt and accurate information and receiving
payments when they are due.
For the manufacturers who are remitting supplemental
rebates, the department has failed to verify the accuracy of
these payments. Further, it does not ensure that all
rebates are accompanied by AMP data and supporting
calculations as required under provisions of the program.
Some manufacturers pay For example, we identified a quarterly rebate payment in
incorrect rebate amounts which a manufacturer paid 10 percent of the total federal
and others do not pay at rebate instead of 10 percent of the AMP. We were unable
all. to identify the total amount that was owed to the State and
the federal government because of the lack of information
provided by the manufacturer. Another quarterly rebate
payment contained a sufficient level of detail to indicate
13
that the supplemental rebate calculated by the
manufacturer was approximately 5.5 percent of the AMP,
instead of the required 10 percent. Because of this
difference, the department collected approximately
$105,000 less than is owed.
Additionally, the department does not always post rebates
received from manufacturers to its records promptly. As of
February 1996, the department had not posted its quarterly
rebate register to reflect the receipt of 24 rebate payments
totaling approximately $6.1 million. Some of these
remittances had been received and processed as far back
as August 1995.
Although the department has the statutory authority to
sanction manufacturers who do not agree to sign a state
supplemental rebate contract by suspending their drugs
from the Medi-Cal List of Contract Drugs (LCD), according
to the chief of the contracting section, it does not have
similar explicit statutory authority for manufacturers who
signed these contracts and either paid an incorrect amount
or did not pay any supplemental rebate. In addition, he
stated that the department does not have explicit statutory
authority to charge interest for late payments. For
example, we identified one manufacturer who signed the
supplemental rebate contract in August 1994 and owed the
State and the federal government $35,485.18 in
supplemental rebates for the period from July 1994 through
June 1995. However, as of February 1996, the
department has not received any supplemental rebates for
three of the four quarterly billing periods and received a
rebate of only
$841.40 for the other quarter, which represents less
than 1 percent of the AMP. The department therefore has
not collected $34,643.78 from this manufacturer and has
not sanctioned the manufacturer.
According to the chief of the contracting section, the
department does not have an aging process to identify
those manufacturers who have not remitted supplemental
rebates. He stated that manufacturers have a contractual
obligation to provide accurate information as to the amount
owed, and
the department has no independent means to determine if
the amount being paid is correct.
14
Many manufacturers have failed to remit some or all
of the supplemental rebates owed. As of January 1996,
319 manufacturers had signed supplemental rebate
contracts. Of this total, 205 manufacturers owed
supplemental rebates
At least 178
related to paid drug claims during one or more of the
manufacturers contracting
quarterly billing periods between July 1994 and June 1995.
to pay supplemental
However, we determined that 178 of these 205
rebates are
manufacturers, or approximately 87 percent, have not paid
delinquent.
a supplemental rebate for one or more of the quarterly
billing periods as of February 1996. Moreover, we
determined that 92 of these 178 manufacturers, or
approximately 52 percent, had not submitted any of their
quarterly supplemental rebates as of February 1996. For
many of those manufacturers remitting supplemental
rebates, we were unable to determine if they had paid the
correct amount because the payments lacked supporting
AMP data.
The federal government believes accurate and prompt
pricing information is important and has established
sanctions for the federal rebate, of which the department
collects approximately 81 percent of the amount it invoices.
Section 1927 of the
Social Security Act (42 U.S.C. 1396r-8[b]) provides for
specific penalties related to the price information provided
by manufacturers. These sanctions include a penalty of
$10,000 per day if a drug manufacturer does not provide
pricing information promptly, termination of the agreement
if the information is not provided within 90 days of the due
date, and a $100,000 penalty for each item of false
information that the manufacturer knowingly provides. In
addition, according
to the department’s billing invoice, interest will be charged
on federal rebate payments that are late.
Between October 1994 and November 1995, the only
drugs that the department suspended from the LCD were
those that were produced by manufacturers who did not
sign the supplemental rebate contracts. According to the
chief of
the contracting section, before October 1995, resolving
manufacturers’ disputes over federal rebate billing invoices
was a priority because he believed the federal billing
invoices represented significant outstanding receivables
15
and he allocated staff resources to this area instead of
monitoring supplemental rebate payments.
In November 1995, the department implemented a
procedure whereby it sends out a series of collection letters
to manufacturers who have not remitted federal and
supplemental rebates from previous quarters. These
collection letters specify the quarter for which federal
rebates are due and remind manufacturers to remit their
state supplemental payments. According to the chief of
the contracting section, the department is considering
including the resolution of outstanding rebate obligations as
part of its negotiation process with drug manufacturers to
add drugs to the LCD.
Conclusion
The department’s inadequate administration of the program
as specified in the law has resulted in approximately
$40 million of uncollected rebates owed to the State and
federal government. Specifically, it has not identified
specific amounts owed by individual manufacturers, has
not tracked those failing to submit rebates, has not
assessed whether the actual amounts received are
appropriate, and has not determined whether it should be
expecting rebates from certain manufacturers. In addition,
it has failed to monitor and sanction manufacturers not
complying with supplemental rebate contracts, which has
contributed to the significant balance of uncollected
rebates.
Recommendations
The department needs to strengthen its efforts to collect
the supplemental rebates that are legally owed to the State
and
the federal government. Specifically, the department
should calculate a dollar amount for the supplemental
rebate on each invoice it sends to manufacturers. If the
department deems it impractical to collect and use AMP
data before billing a manufacturer, it should seek statutory
authority to use ingredient cost or another pricing base it
already possesses as the statutorily approved pricing base.
16
The department also should focus on monitoring and
sanctioning manufacturers. Each supplemental rebate
payment should be verified for accuracy to ensure that the
amount remitted is the amount owed. In addition, all
receipts should be posted to the records promptly to assist
in tracking manufacturers who owe rebates. The
department also should establish sanctions for late
information and inaccurate information. Moreover, it
should sanction manufacturers who do not pay the rebate,
do not pay the correct rebate, or pay the rebate late. If the
department believes it does not have adequate statutory
authority, it should seek legislative changes to allow the
suspension of manufacturer’s drugs from the LCD if it does
not pay the rebate and to charge interest on late payments.
17
Chapter 2
The Department Does Not Clearly
Document That Its Drug Reviews
Address Legal Requirements
Chapter Summary
T
he Department of Health Services (department) uses
two methods to modify the Medi-Cal List of Contract
Drugs (LCD). One method is to conduct a
therapeutic category review (TCR) that assesses a specific
category of drugs
designed to treat a particular symptom. The other is to
conduct an individual drug review of a specific drug for
addition to the LCD. When adding to, removing from, or
retaining drugs on the LCD, the Welfare and Institutions
Code requires the department to use the criteria of safety,
effectiveness, essential need, misuse potential, and cost.
Although the department prepares various types of
documents related to its reviews and asserts that it
conducts its drug reviews in accordance with criteria
stipulated in the Welfare and Institutions Code, it does not
uniformly prepare and maintain its documents in a manner
that clearly demonstrates that these criteria were the basis
for its decision.
The Department Uses Two Methods
To Add Drugs to the LCD
The 1990 legislation describing the original drug discount
program established the LCD. Those drugs that were part
of the existing Medi-Cal Drug Formulary as of July 1, 1990,
were automatically included on the LCD until the
manufacturer and the department concluded contract
negotiations. If the manufacturer did not agree to execute
a contract offering its drugs at its best price, the
manufacturer’s drugs could be suspended from the LCD.
The department uses two methods to add drugs to the
The department conducts
LCD. One method is to conduct a TCR, which is a review
therapeutic category
reviews and individual
drug reviews to modify
the LCD. 18
of a specific category of drugs designed to address a
particular symptom or ailment. According to the
supervising pharmaceutical consultant of the department’s
Medi-Cal contracting section (contracting section), the
department selects the categories it plans to review based
on areas of concern, such as cost, usage, and therapeutic
value.
Another method is to conduct an individual drug review.
According to the supervising pharmaceutical consultant,
individual drug reviews result from a petition by a source
outside the department, such as a manufacturer or a
physician, or are initiated by the department staff.
The Department Cannot Demonstrate
That It Conducts Drug Reviews
in Accordance With Law
After the department announces a TCR or receives a
petition, its pharmacy staff reviews the drug or drugs being
considered. When the department adds drugs to, deletes
them from, or retains them on the LCD,
Section 14105.39(d) of the Welfare and Institutions Code
requires the department to use the criteria of safety,
effectiveness, essential need, misuse potential, and cost.
Appendix C provides additional information on this
review process. The department’s written procedures
consist of a one-page document that addresses the
procedures for requesting recommendations from the
Medi-Cal Contract Drug Advisory Committee (committee)
members, sending correspondence of committee actions to
It is not clear whether the
the Pharmaceutical Research and Manufacturing
department followed all
Association, and notifying manufacturers that the
five criteria established in
committee will be reviewing their drugs. According to the
law when evaluating
supervising pharmaceutical consultant of
drugs for the LCD.
the contracting section, pharmacy staff members adhere to
the provisions in the Welfare and Institutions Code that
outline
the criteria to be followed, which he believes are sufficient
to make decisions regarding changes to the LCD.
Although the department may consider each of the five
criteria stated in
the law, we found that the documentation that the
department prepares during its review process does not
clearly demonstrate that it considered these provisions.
19
The department prepares various types of documents
related
to its reviews but does not uniformly prepare and maintain
its documents in a manner that clearly demonstrates that
the criteria stated in the Welfare and Institutions Code
were the bases for its decisions. As mentioned previously,
the department solicits therapeutic recommendations from
the committee for drugs being reviewed. Section 14105.4
of the Welfare and Institutions Code stipulates that these
recommendations shall be in accordance with the criteria
mentioned in the code. Ideally, the department should
send evaluation forms to all committee members
specifically requesting them to rate the safety,
effectiveness, essential need, and misuse potential of the
drugs being reviewed, along with explanations supporting
their ratings and conclusions. Instead, the department
requests that committee members provide “an evaluation
as to which drugs being considered are essential for
inclusion on the LCD to meet the health care needs of
Medi-Cal beneficiaries.” However, the department does
not define or provide guidance for this evaluation. The
department also asks the committee members to comment
on those drugs that they believe are neither superior nor
inferior, from a clinical and therapeutic point of view,
relative to other drugs within the same therapeutic
category. The department does not require or suggest a
format for these comments.
As a result, the committee’s responses do not specifically
address the criteria specified in law and vary in their
content. For example, some members stated in their
Some drug advisory
responses that they were not recommending certain types
committee members
of drugs because an adequate number of similar drugs
recommended adding
were already on the LCD. Other members indicated that
drugs to the LCD without
certain drugs should be added to the LCD but did not
providing supporting
provide any explanations to support their
explanations.
recommendations. These responses did not specify
whether the members considered the drugs being reviewed
to be safe or effective, even though the Welfare and
Institutions Code specifies that they use these criteria.
The department’s pharmacy staff is responsible for
reviewing the committee recommendations, performing
analyses, and making recommendations on the drugs to be
added, not added, removed, and retained. Pharmacy staff
members also should be using a standard evaluation form
20
to document whether those drugs under review specifically
meet the criteria in the Welfare and Institutions Code.
Such a form would assist the
department in establishing uniform evaluation parameters
among its reviews. The files we reviewed did not uniformly
or consistently document that the Welfare and Institutions
Code criteria were the bases for actions taken. For
example, one individual drug review file that we reviewed
contained an analysis of the drug based on the criteria as
well as an analysis of the costs. Another individual drug
review file contained only a few notes discussing drug
costs and no written therapeutic analysis that addressed
safety, effectiveness, essential need,
or misuse potential. For TCRs, the files contained cost
analyses, correspondence to the drug manufacturers and
to committee members requesting their input, and
correspondence announcing committee recommendations
and the department’s decision. However, not all individual
drug review files and TCR files included the same level of
detail or support documenting the basis for decisions and
verifying that all criteria were considered.
According to the supervising pharmaceutical consultant of
the contracting section, individual pharmacists assigned to
conduct the drug reviews are responsible for coordinating
and supplying information to conduct these reviews. The
supervising pharmaceutical consultant also stated that
the pharmacy staff usually keeps this documentation at
least until a decision is finalized and appeals are resolved,
but the department does not have a formal policy for record
retention in this area.
Further, according to the chief of the contracting section,
the pharmacy staff does not prepare documents for
individual
drug reviews that specifically addressed that they
considered the criteria stipulated in the Welfare and
The department believes
Institutions Code. He stated that the letter sent to the
that it is not necessary to
manufacturer indicating that its drug was not added
prepare written
identifies which of the criteria was the basis for the
documentation addressing
decision. If the letter indicates that the drug will not be
the five criteria.
added because of a concern with a therapeutic criterion,
such as misuse potential, it can be implied that the other
therapeutic criteria of safety, effectiveness, and essential
need are acceptable. Cost may be a concern that needs
to be addressed once the therapeutic concerns are
21
resolved. Therefore, he believes that it is unnecessary to
prepare internal written documentation addressing all five
criteria.
Although the department asserts that it always considers
the five criteria when it conducts drug reviews, without
standardized and sufficient written documentation to
support its conclusions, the department cannot document
that all drugs are reviewed uniformly.
According to the chief of the contracting section,
manufacturers are informed why their drugs are not added
to the LCD. He indicated that manufacturers are aware of
the therapeutic value of their own products in comparison
with the products of their competitors. Further, he stated
that manufacturers compete for formulary status with other
manufacturers in the private sector as a regular part of their
business operations and that the department’s contracting
activities are no different. He believes that manufacturers
can assess how their drugs compare with other drugs in
the market. The chief also stated that the department
contacts manufacturers directly and negotiates rebates, so
manufacturers should be aware of the cost evaluations
performed by the department. Accordingly, manufacturers
should know whether their drugs were rejected based on
cost.
Conclusion
Although the department prepares various types of
documents related to its reviews, it does not uniformly
prepare and maintain its documents in a manner that
clearly demonstrates that all evaluations are uniformly
performed and that the criteria stated in the Welfare and
Institutions Code were the basis for its decisions. As a
result, the department cannot document that
it considered all the criteria in the Welfare and Institutions
Code when it made its decisions to include some drugs and
exclude other drugs from the LCD.
Recommendations
22
The department should develop specific guidelines and
documentation standards for conducting TCRs and
individual drug reviews. Specifically, it should develop and
retain standard evaluation documents and instruct the
committee members and the pharmacy staff to use these
during the review process. These documents should
indicate whether the drug being reviewed meets each of
the criteria stipulated in Section 14105.39(d) of the Welfare
and Institutions Code.
In addition, pharmacy staff members should prepare
schedules, analyses, and other relevant documentation to
support their decisions.
23
[Blank page inserted for reproduction purposes.]
24
Chapter 3
The Supplemental Rebate Program Has Not
Significantly Limited Accessibility to Drugs,
and Potential Revenue From the
Program Far Exceeds Program Costs
Chapter Summary
T
he supplemental rebate program has not significantly
reduced the availability of drugs to Medi-Cal
beneficiaries. Of the approximately 600 drugs on the
Medi-Cal List of Contract Drugs (LCD) before July 1994,
only 16 were suspended by the Department of Health
Services (department) because the manufacturers of these
drugs would not participate in the supplemental rebate
program. In addition, the program
is cost beneficial to the State. If the department properly
administers the program, it can expect revenue of
approximately $70 million, which is significantly higher than
the total costs of $5 million required to administer the
program.
The 1994 Legislation Has Had a
Minimal Effect on Drug Availability
The original Medi-Cal drug discount program was
established in 1990. One of the major objectives of this
program was to ensure that Medi-Cal beneficiaries have
access to appropriate drug therapies and a comprehensive
range of drug products. Before this initial program was
established, drugs for which Medi-Cal would reimburse
could be added only by regulation.
New state legislation in 1994 implemented a supplemental
rebate that manufacturers were required to submit for all
drugs subject to the federal rebate, except for specific
drugs exempted by state statute. This legislation
stipulated that the drug products of any manufacturer who
failed to sign a supplemental rebate contract by
September 30, 1994, would be available to Medi-Cal
25
beneficiaries only through prior authorization. The
department enforced this legislation by suspending 16 of
the approximately 600 drugs on the LCD before July 1994
because six manufacturers would not participate in the
supplemental rebate program.
The department initially identified 49 drugs subject to
potential suspensions after the supplemental rebate law
was implemented. As illustrated in Table 2, 17 of the 49
potential suspensions did not take effect because the
manufacturers of these drugs signed the supplemental
rebate agreement shortly after the department announced
it would suspend these drugs from the LCD. Another 16 of
the 49 drugs were not affected by the suspensions
because they were still available on the LCD for various
reasons. For example, Section 14105.35(a)(2) of the
Welfare and Institutions Code stipulates that, in the
absence of a contract with the manufacturer, the
department’s director may retain a drug on the LCD if she
determines that an essential need exists for the drug and
other drugs that meet the need are not on the LCD.
Table 2
Effect of the 1994 Legislation on the LCD
Total number of drugs initially designated by the
department to be suspended 49
Number of drugs for which suspension was
avoided because the manufacturers ultimately
signed rebate contracts 17
Number of drugs not affected by the suspensions 16
Less: Total number of drugs that are still available
on the LCD 33
Total Number of Drugs Suspended From the LCD
16
as of November 1995
26
Another reason that the department did not suspend a drug
from the LCD is that the drug is available from a different
manufacturer who signed a supplemental rebate contract
with the department. The remaining 16 drugs, produced
Only 16 drugs were
by a total of six drug manufacturers refusing to sign the
suspended from the
LCD because the supplemental rebate contract, are not available in any form
manufacturers refused to on the LCD as of November 1995. As seen in Appendix
participate in the D, we found that these 16 drugs covered seven therapeutic
program. categories. A drug that the department suspends from the
LCD is still available without prior authorization to those
beneficiaries who had access to the drug before its
suspension. As a result, the only beneficiaries who would
require prior authorization from the department were those
who initially requested the drug after its suspension.
Between October 1994 and November 1995, the
department added 17 new drugs to the LCD as a result of
therapeutic category reviews and individual drug reviews.
These drugs are not intended to replace the 16 drugs that
the department suspended from the LCD as a result of the
1994 legislation. As shown in Appendix E, these 17 drugs
covered seven therapeutic categories.
Potential Revenue From the
Supplemental Rebate Program
Far Exceeds the Program Costs
To determine whether the 1994 legislation establishing the
supplemental rebate program resulted in administrative
costs that outweigh the potential revenue that the
supplemental rebate program could generate, we first
analyzed the treatment authorization requests (TAR) for the
The suspension of the
16 drugs that had been suspended from the LCD. A
16 drugs from the LCD
provider submits a TAR to request prior approval from the
resulted in only two
department for reimbursement for drugs not on the LCD
TARs approved for these
prescribed for Medi-Cal beneficiaries. To determine if the
drugs during fiscal year
suspension of the 16 drugs caused an increase in TAR
1994-95.
activity, we identified the number of TARs approved for
these drugs after the effective date of the 1994 legislation.
We found that suspension of the 16 drugs resulted in a
total of only two TARs approved for these drugs during
fiscal year 1994-95. Therefore, the department did not
incur any significant additional costs for approving TARs for
these 16 drugs.
27
Next, we reviewed the change in the number of TARs
processed by the department from fiscal year 1990-91
through fiscal year 1995-96. We projected fiscal year
1995-96 TARs processed based on actual data for the first
six months of this year. As illustrated in Figure 1, the
department processed 281,572 TARs in fiscal year
1993-94 and 544,824 TARs in fiscal year 1994-95. Of the
fiscal year 1994-95 total, 387,872 TARs pertain to requests
for drugs that were not on the LCD. The remaining
156,952 additional TARs processed pertain to a policy
change that the department implemented during fiscal year
1994-95 that required providers to submit a TAR if a
beneficiary exceeded a specific number of prescriptions.
Figure 1
TARs Processed From Fiscal Year 1990-91
Through Fiscal Year 1995-96
800,000
600,000
400,000
200,000
0
90-91 91-92 92-93 93-94 94-95 95-96
(Projected)
Fiscal Years
Although we found that the number of TARs approved
following suspension of the 16 drugs from the LCD was
minimal, we identified the fiscal year 1994-95
administrative costs
associated with operating the program. We have included
the administrative cost of TARs that the department
processed for drugs not on the LCD as well as the staffing
costs of the department’s Medi-Cal contracting section
(contracting section), the section responsible for
administering the program. First,
we calculated the fiscal year 1994-95 administrative
28
sRAT
fo
rebmuN
Total TARs Processed
TARs Processed for Non-LCD Drugs
costs associated with the department’s processing of the
387,872 TARs described above. Based on the costs of
processing TARs, including staffing costs for pharmacists,
medical transcribers, and pharmaceutical consultants, as
well as overhead costs, we calculated an average cost per
TAR of $9.40 for fiscal year 1994-95. This amount
includes additional costs of contract staff members whom
the department brought in to assist with the processing of
TARs during this period. Therefore, the department
incurred costs of approximately $3.7 million to process
TARs for drugs not on the LCD in fiscal year 1994-95.
We also identified the fiscal year 1994-95 staffing costs of
the department’s contracting section. According to data
Potential program
provided by the department’s budget division, fiscal year
revenue is 14 times
1994-95 personnel costs for the department’s contracting
program costs.
section were approximately $1.3 million. Therefore, we
determined that the department incurred costs of
approximately $5 million during fiscal year 1994-95 to
administer the program. The potential revenue from the
fiscal year 1994-95 supplemental rebates of approximately
$70 million far exceeds the department’s costs
of administering the program.
In contrast, the department realized only $10.5 million in
collections of fiscal year 1993-94 supplemental rebates
from the program under the 1992 legislation, when the
department aggressively negotiated with drug
manufacturers for rebates. Clearly, the potential revenues
from properly administering the present program far exceed
the revenues actually received from the prior program.
Conclusion
The supplemental rebate program has not significantly
reduced the availability of drugs to Medi-Cal beneficiaries.
Only 16 drugs were suspended from the LCD by the
department because the manufacturers of these drugs
would not
participate in the supplemental rebate program. In
addition, the program is cost beneficial to the State. If the
department properly administers the program, it can expect
revenue of approximately $70 million, which is significantly
higher than the total cost of approximately $5 million
required to administer the program.
29
We conducted this review under the authority vested in the state auditor by Section 8543
et seq. of the California Government Code and according to generally accepted
governmental auditing standards. We limited our review to those areas specified in the
audit scope section of this report.
Respectfully submitted,
KURT R. SJOBERG
State Auditor
Date: March 27, 1996
Staff: Philip Jelicich, CPA
Linus Li, CPA
Christine Berthold
Caroline Gilmour
Brian Lewis, CPA
Debra Maus
30
Blank page inserted for
reproduction purposes only.
31
Appendix A
A History and Analysis of the Estimates of
Savings Related to the Medi-Cal
Drug Rebate Program
I
n the following pages, we have provided details of the
specific estimates addressed in the fiscal year 1990-91
Governor’s Budget Summary and a therapeutic category
review (TCR) report submitted to the Legislature.
Additionally, we have provided details of the estimated net
savings that the Department of Health Services
(department) included in its revised budget estimate policy
changes prepared in May of each year. These estimates
are made for both the current and budgeted years each
November and are revised the following May. Each
estimate accounts for both the federal and state portion of
expected revenues or required funding. For estimation
purposes, the department assumes an equal distribution
between the federal government and the State. These
policy change estimates have also been summarized in
Appendix B.
State Original Drug Discount
Program Rebates
In the fiscal year 1990-91 Governor’s Budget Summary, the
department estimated that a $50 million savings ($23.9
million to go to the State’s General Fund) would be
generated by implementing the proposed Medi-Cal Drug
Discount Program, scheduled to become effective in
January 1991. The estimate was developed in a May
1990 Medi-Cal policy change. The savings were
associated with price reductions offered by drug
manufacturers who were expected to contract with the
State under the proposed program. Although no contracts
had been negotiated at that time, the department estimated
a 30 percent savings on the ingredient cost of all
prescription drugs purchased under Medi-Cal. However,
this program, which included a feature whereby the State
would assume ownership of the drugs, was never
approved. Alternatively, the department implemented a
32
drug discount program in July 1990. In the revised budget
policy change for fiscal year 1990-91, the department
estimated cash basis savings of $8.86 million ($4.43 million
to go to the State’s General Fund) from rebates related to
the first 11 contracts negotiated under the program.
According to the chief of the Medi-Cal contracting section
(contracting section), the department did not make any
further estimates to the original drug discount program
because the focus of the contract negotiations changed as
a result of the required rebates under the new federally
mandated program. The chief also stated that the savings
were difficult to estimate because conditions varied
between contracts.
Federal Rebates
The nationwide mandated drug rebate program was
implemented in January 1991. In the revised budget for
fiscal year 1990-91, the department added a policy change
that estimated cash basis savings of $3.5 million ($1.75
million for the State’s General Fund) related to this new
program. The estimate was based on 12 percent of
annual paid prescriptions and allowed for the midyear
program implementation date. At the time, federal
regulation required a minimum 12.5 percent rebate on
single-source and innovator multiple-source drugs, and a
10 percent rebate on all other drugs. The department has
continued to estimate annual savings related to this
program.
In the revised budget policy change for fiscal year 1991-92,
the department estimated cash basis savings of $73.5
million ($36.75 million for the State’s General Fund) based
on the prior quarterly billing invoices and applying a 90
percent collection rate to account for billing disputes. Four
quarters of data were available at that time. For fiscal year
1992-93, the department estimated cash and accrual basis
savings of $234.7 million ($117.35 million for the State’s
General Fund) based on the prior six quarters of billing
invoices and a 90 percent collection rate. For fiscal year
1993-94, the department estimated accrual basis savings
of $217.26 million ($108.63 million for the
State’s General Fund) based on a five-quarter average and
a 95 percent collection rate. Finally, for fiscal year
1994-95, the department estimated accrual basis savings
33
of $219.4 million ($109.7 million for the State’s General
Fund) based on a seven-quarter average and a 95 percent
collection rate. The department reduced this estimate by
an additional 5 percent to account for the implementation of
prescription limitations placed on drug treatment
authorization requests (TAR) during the fiscal year.
State Negotiated
Supplemental Rebates
The 1992 legislation stipulated the State’s expanded role in
negotiating with drug manufacturers. Therefore, the
department began to include a separate budget policy
change estimating
the negotiated supplemental rebates that resulted from
the department’s aggressive contract negotiations. These
supplemental rebates and related contract negotiations
evolved from the contracts first negotiated when the
original drug discount program was implemented in July
1990. In the revised budget policy change for fiscal year
1992-93, the department estimated accrual basis savings
from these negotiated contract rebates at $39.5 million
($19.75 million for the State’s General Fund). According to
the chief of the contracting section, these rebates were
difficult to estimate because the terms of each contract
varied by manufacturer. The department expected an
additional 5 percent in rebates over and above the federal
rebate amounts and used this assumption as the basis for
the supplemental rebate estimate.
In the revised budget policy change for fiscal year 1993-94,
the department estimated negotiated supplemental rebates
on an accrual basis of $9.9 million ($4.95 million for the
State’s General Fund). The estimate represented one
quarter of the fiscal year 1992-93 supplemental rebate
estimate. According to the chief of the department’s fiscal
analysis unit, this program transitioned to the new state 10
percent supplemental rebate program, which was to be
implemented in fiscal year 1994-95.
State 10 Percent Supplemental Rebates
The 1994 legislation implemented a 10 percent
supplemental rebate, effective July 1, 1994. According to
34
the department’s budget estimate documentation, the initial
purpose of this
rebate was to fill a $20 million ($10 million for the State’s
General Fund) budget deficit. This deficit was created by
a budget year estimate, developed in May 1994, related
to a proposed pharmacy management program that was
never approved. The department determined that a rebate
percentage of approximately 5 percent would generate
$20 million over a six-month period.
According to the chief of the contracting section, the initial
purpose of the rebate was to implement one component of
a three-part negotiated budget agreement for fiscal year
1994-95. The 10 percent supplemental rebate was
negotiated as a compromise to replace a previously
proposed pharmacy management program that was
reflected in the original fiscal year 1994-95 budget
estimate. He further stated that the department’s initial
calculations assumed implementation of a 5 percent
supplemental rebate but was ultimately doubled to
10 percent to balance the budget.
In the revised budget policy change for fiscal year 1994-95,
the department estimated accrual basis savings of $69.8
million ($34.9 million for the State’s General Fund) related
to the 10 percent supplemental rebates. In developing this
estimate, the department used the ingredient cost of total
Medi-Cal drug claims paid during the calendar year 1994,
excluding medical supplies and cancer and acquired
immune deficiency
syndrome (AIDS) drugs. This base amount was then
reduced by approximately 21 percent to account for the
difference between the ingredient cost and average
manufacturer price and to account for manufacturers who
would refuse to sign agreements. Adjustments were also
made for the effect of the prescription limits placed on
TARs during the fiscal year.
Other Savings and Costs
Associated With the Program
The department submitted a report to the Legislature in
February 1994 that addressed estimated savings related to
its first three TCRs. For each drug category reviewed, the
department projected annual savings related to lower
ingredient cost expenditures and additional drug rebates.
35
These reviews covered the anti-ulcer agent category, the
non-steroidal anti-inflammatory drug (NSAIDS) category,
and the angiotension converting enzyme (ACE) inhibitor
category. In the anti-ulcer agent category, the department
estimated annual savings of $4.75 million as a result of
deleting two drugs and renegotiating existing contracts for
the retained drugs in this category. In the NSAIDS
category, the department estimated annual savings of
$8.57 million as a result of deleting one drug and
renegotiating existing contracts. In the ACE inhibitor
category, estimated annual savings were $6.85 million as a
result of deleting seven drugs and renegotiating existing
contracts. Total savings estimated as a result of the
department’s first three TCRs were $20.2 million. We did
not attempt to validate any of these estimates.
As stated previously, the TCR report addressed savings to
be generated from lowered ingredient costs as well as
additional rebates. For budgeting purposes, the
department included a separate policy change related to
the savings that would be generated by limiting drugs as a
result of TCRs. In the revised budget policy change for
fiscal year 1993-94, the department budgeted for savings
of $15.9 million ($7.95 million for the State’s General Fund)
expected as a result of restricting brand name and
single-source drugs on the Medi-Cal List of Contract Drugs
(LCD) through the TCR process. The additional rebate
savings resulting from TCRs were included within the drug
rebate policy change estimates.
Additionally, throughout the program, the department
budgeted for various net costs related to maintaining the
LCD. These amounts include costs of adding new drugs
to the LCD as required by state law The amount of each
of these budget estimates can be seen in Appendix B.
Blank page inserted for reproduction purposes only.
36
Appendix B
Medi-Cal Drug Rebate Program
Budget Estimates of Net Savings
(in Thousands)
Fiscal Year Total Rebates Percent
1990-91 1991-92 1992-93 1993-94 Estimate Collecte Collecte
1994-95 s d d
State original drug discount
program rebates $ 8,863 $ 8,863
Federal rebates a b 3,540 $73,532 $234,735 $217,253 $219,408 748,468 $660,685 87%c
State negotiated supplemental rebates 39,500 9,875 49,375 13,118 27
State 10 percent supplemental rebates 69,741 69,741 29,891 43
Subtotal: Drug Rebatesd (Revenue) 12,403 73,532 274,235d 227,128 289,149
Other Savings and Costs
Associated With the Program
Perform therapeutic category
reviews (Reduced cost) 15,918
Add new drugs to the Medi-Cal
List of Contract Drugs (Additional cost) (5,559) (1,597) (9,582) (1,997) (5,997)
Net savings related to the drug rebate $ 6,844 $71,935 $264,653 $241,049 $283,152
program
a For fiscal year 1990-91, the department’s accounting records commingled State original drug discount program rebate payments with the
federal rebate payments. Accordingly, the total rebates collected and percent collected account for the original drug discount program rebate
estimate of $8.863 million and the related payments.
b Federal rebates collected include rebates received for programs other than Medi-Cal. Based on the department’s billing invoices, we
determined that rebates related to these other programs are immaterial.
c Although the department has collected 87 percent of the $757 million federal rebate budget estimate, it has collected only 81 percent of the
$818 million federal rebate amounts invoiced. The department budget estimate is less than the invoice amount because it reduces its budget
estimate for invoices with unresolved disputes.
d During fiscal year 1992-93, estimates were converted from a cash basis to an accrual basis of accounting.
37
Blank page inserted for reproduction purposes only.
38
Appendix C
The Medi-Cal List of Contract Drugs
Therapeutic Categories on the
List of Contract Drugs
T
he List of Contract Drugs (LCD) contains various
therapeutic categories associated with ailments
relating to a particular function or area of the body.
For example, the otic preparations category is for drugs
related to the treatment
of ear infections. Other categories include gastrointestinal
drugs used in treating heartburn, anti-infectives used in
treating conditions such as athlete's foot, and biological
drugs, which include the flu vaccine. We have
summarized the LCD into
14 major therapeutic categories, as seen in Table 3. As of
November 1995, 594 specific drugs were listed on the
LCD.
Table 3
Contract Drugs by Therapeutic Category
as of November 1995
Number of Drugs
Therapeutic Category on the LCD
Anti-infectives 83
1.
Antineoplastics 57
2.
Autonomic drugs 47
3.
Biologicals 4
4.
Blood modifiers 10
5.
Central nervous system drugs 70
6.
Diuretics and cardiovasculars 71
7.
Gastrointestinal drugs 18
8.
Hormones 35
9.
39
10. Metabolic supplements 19
11. Ophthalmic preparations 41
12. Otic preparations 5
13. Topical and local preparations 25
14. Other 60
Drugs with multiple categories 49
Total 594
Source: Department of Health Services Medi-Cal contracting section.
The Department’s Procedures
for Adding Drugs to the LCD
As of February 1996, the Department of Health Services
(department) has completed 11 therapeutic category
reviews (TCR). The department completed its first TCR in
January 1993 and finished its most recent TCR in February
1996. Refer to Table 4 for a summary of these TCRs.
The department has also completed several individual drug
reviews during the program’s existence; however, it does
not have a complete record
of these reviews. According to the supervising
pharmaceutical consultant of the department’s Medi-Cal
contracting section (contracting section), the department’s
list of individual drug reviews contains reviews performed
only as far back as 1994. Table 5 summarizes the
information we obtained from this list by major therapeutic
category.
Table 4
Summary of TCRs Performed
Not
Total Adde Remove Adde
Date TCR Drugs d to Retaine d From d to
Completed Reviewe LCD d on LCD LCD
d LCD
Anti-ulcer agents 1/93 7 0 5 2 0
1.
Angiotensin converting
2. enzyme inhibitors 4/93 10 0 3 6 1
Non-steroidal
3. anti-inflammatory
drugs 4/93 25 0 14 1 10
Beta blockers 12/93 20 1 9 4 6
40
4.
Lipids 12/93 10 0 7 1 2
5.
Calcium blockers 12/93 13 2 9 0 2
6.
Asthma drugs 5/95 17 0 9 3* 5
7.
Antiparkinson drugs 2/95 14 1 9 0 4
8.
Dermatologic drugs 7/95 34 4 3 2* 25
9.
10. Antibiotics 9/95 136 6 50 5* 75
11. Antidepressants 2/96 20 4 8 0 8
Total 306 18 126 24 138
Source: Department of Health Services Medi-Cal contracting section.
* Section 14105.38 of the Welfare and Institutions Code requires the department to
conduct a public hearing if it determines that a drug should be deleted from the LCD.
As of November 1995, these drugs were still on the LCD because a public hearing had
not been conducted.
Table 5
Summary of Individual Drug Reviews
Initiated in 1994 and 1995
Total Drugs Drugs Open, Deferred, or
Therapeutic Category Review Adde Not Canceled Reviews
s d Added
1. Anti-infectives 10 1 4 5
2. Antineoplastics 0 0 0 0
3. Autonomic drugs 22 2 17 3
4. Biologicals 0 0 0 0
5. Blood modifiers 1 0 1 0
6. Central nervous system drugs 21 1 14 6
7. Diuretics and cardiovasculars 12 4 7 1
8. Gastrointestinal drugs 7 4 2 1
9. Hormones 14 8 3 3
10. Metabolic supplements 6 1 5 0
11. Ophthalmic preparations 9 2 5 2
12. Otic preparations 0 0 0 0
13. Topical and local preparations 21 4 15 2
14. Other 15 6 5 4
Total 138 33 78 27
Source: Department of Health Services Medi-Cal contracting section.
41
The pharmacy staff at the contracting section contributes to
both the TCR and individual drug reviews, with one
pharmacist responsible for coordinating and supplying
information necessary to conduct the review. After the
department has decided to review a drug or category of
drugs, both TCRs and individual drug reviews follow the
same basic process. The department informs the
manufacturers and the Medi-Cal Contract Drug Advisory
Committee (committee)
that it is conducting a TCR or an individual drug review.
The committee consists of a separate advisory group
comprised of at least one physician, a pharmacist, a
Medi-Cal
beneficiary, and a representative from schools of pharmacy
or
pharmacology. Committee members provide the
department with recommendations on the therapeutic value
of these drugs. The pharmacy staff considers these
recommendations along with its own discussions of the
specific drugs being reviewed.
The department considers the net cost of the drug to the
State, which represents the amount reimbursed to
providers
less the rebate received from manufacturers. As
explained
in the following paragraph, in certain cases, the pharmacy
staff performs a detailed cost analysis of the drugs
under consideration. According to the chief of the
contracting section, for TCRs, the pharmacy staff prepares
its recommendations and the department’s director makes
the
final decision. For individual drug reviews, the pharmacy
staff prepares its recommendations and the chief of the
contracting section makes the final decision. The
department notifies committee members and
manufacturers of the decisions. If necessary, the
department’s director decides on the outcome of appeals.
The Effect of TCRs on Drug Treatment
Authorization Request Activity
To assess the effect of TCRs on drug treatment
authorization request (TAR) activity, we reviewed the
composition of TARs approved in fiscal year 1994-95 for
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drugs not included on
the LCD. During this year, three of the antidepressant
category drugs, Paxil, Wellbutrin, and Prozac, comprised
approximately 12.6 percent of these approved TARs. In
February 1996, the department conducted a TCR for this
category and added these three drugs to the LCD. As a
result, we would expect the increase in the number of
TARs for antidepressants in future fiscal years to be lower
than it would have been without the TCR.
Consideration of Cost During
the Review Process
As noted above, one of the components of the review
process is a cost analysis. TCR cost analyses consist of
computer spreadsheets that have several columns detailing
various aspects of drug costs, including net cost to the
State. The analyses are set up to depict a baseline mix,
which represents the current status of drugs on the LCD
along with a best rebate offer mix and several other mixes
representing different combinations of
drugs on the LCD. The pharmacy staff does not
necessarily include all drugs in this analysis. According to
the supervising pharmaceutical consultant, for TCRs, the
staff discusses the various mixes and identifies the mix of
drugs that results in
the highest acceptable therapeutic value with an
acceptable net cost to the State. He stated that for TCRs,
the evaluation process includes a discussion of potential
offsetting costs, such as adding a particular drug to save
hospitalization costs in the future. However, according to
the supervising pharmaceutical consultant, therapeutic
superiority may outweigh lowest
cost. Through October 1995, for six of the eight complete
TCR cost analyses available, the department selected a
mix that did not project the lowest net cost. For two of the
eight, the department selected the lowest cost drug
combination.
In November 1995, the department continued to compute
net cost to the State when performing its cost analysis for
the
TCR of the antidepressant category. However, for this
TCR,
the pharmacy staff included quantifiable offsetting costs,
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such
as hospitalization costs, as part of its overall analysis.
According to the supervising pharmaceutical consultant,
although quantifiable offsetting costs were not included as
part of the overall analysis until the TCR for the
antidepressant category was conducted, unquantifiable
offsetting costs have been considered and used as part of
the overall evaluation process for the previous TCRs.
According to the supervising pharmaceutical consultant,
the pharmacy staff always evaluates the cost of a drug
during an individual drug review. However, the
department has not retained cost analysis documentation
for all drugs.
Important Therapeutic Gain Drugs
Section 14105.39(c) of the Welfare and Institutions Code
specifies that any new drug designated as having an
important therapeutic gain and approved for marketing by
the federal Food and Drug Administration (FDA) shall be
immediately included on the LCD for a period of three
years provided that certain conditions are met. Before
1992, the FDA developed a drug classification and priority
review policy to use in identifying new drugs that it
scheduled to review. The drugs that the FDA rated “A”
were considered drugs that had an important therapeutic
gain. Those drugs that were rated “B” or “C” were
considered drugs that had a modest therapeutic gain or
little or no therapeutic gain.
In January 1992, the FDA revised its drug classification and
priority review policy and classified new drugs with a “P” or
“S” rating. The new policy focused on identifying the drugs
that had a priority status for FDA review, which were coded
“P,” and those that could be reviewed through the standard
process, which were coded “S.” The code “P” drugs
included, among others, those that represented a
therapeutic advance with respect to available drug therapy.
The code “S” drugs were those that appeared to have
therapeutic qualities similar to
those of one or more already marketed drugs. According
to the chief of the contracting section, the current FDA “P”
and
“S” drug classification and priority review policy does not
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designate drugs as having important therapeutic gain.
Therefore, he believes that Section 14105.39(c) of the
Welfare and Institutions Code is obsolete and cannot be
enforced because there is no unbiased source of
information to designate which drugs represent important
therapeutic gain.
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Appendix D
Therapeutic Classifications of the 16 Drugs
Suspended From the List of Contract Drugs
as a Result of the 1994 Legislation
Anti-infectives Cefonicid Sodium
Cefuroxime Axetil
Oxiconazole Nitrate*
Autonomic drugs Diphenidol
Ondansetron
Central nervous system drugs Ethosuximide
Fentanyl
Methsuximide
Phensuximide
Diuretics and cardiovasculars Quinapril Hydrochloride
Triamterene
Otic preparations Hydrocortisone with Neomycin and Colistin
Topical and local preparations Alclometasone Dipropionate
Anthralin
Oxiconazole Nitrate*
Other Ambenonium Chloride
Auranofin
*This drug has two therapeutic classifications.
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Appendix E
Therapeutic Classifications of the 17 Drugs
Added to the List of Contract Drugs
Between October 1994 and November 1995
Anti-infectives Amikacin Sulfate
Ceftazidime
Ceftriaxone Sodium
Erythromycin Base
Flucytosine
Piperacillin Sodium
Antineoplastics Medroxyprogesterone Acetate*
Vinorelbine Tartrate
Autonomic drugs Pergolide Mesylate
Biologicals Immune Globulin, RH (D), Intravenous
o
Central nervous system drugs Doxepin Hydrochloride
Temazepam
Hormones Estrogens, Conjugated with
Medroxyprogesterone Acetate
Estrogens, Esterfied with Methyltestosterone
Medroxyprogesterone Acetate*
Metformin Hydrochloride
Topical and local preparations Fluocinonide
Prednicarbate
*This drug has two therapeutic classifications.
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California State Auditor’s Comments:
To provide clarity and perspective, we are commenting on the Department of Health
Services’ (department) response to our audit report. The numbers correspond to the
numbers we have placed in the response.
We agree with the department that there is some uncertainty as to the exact amount of
supplemental rebates collected. As stated on page 4 of our report, the amount we
calculated represents the rebates that the department collected through February 29,
1996, based on data we obtained from the accounting records. We did not determine the
accuracy of all of this data; however, we corrected for errors that came to our attention.
The nature of these errors could cause the supplemental rebate collections to be
understated and the federal rebate collections to be overstated.
The department misinterpreted our recommendation. If using
average manufacturer price for billing is impractical, we
recommended that the department seek statutory authority to
use ingredient cost or another pricing base it already
possessed as the statutorily approved pricing base. Our
intention was a replacement for the price component of the
calculation rather than a surrogate that would require a labor
intensive reconciliation. We added the phrase “as the
statutorily approved pricing base” to clarify our
recommendation.
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