Summary

December 1997 96038 rotiduA etatS ainrofilaC Department of Health Services: Its Drug Management Techniques Are Similar to Those of Health Maintenance Organizations The first printed copy of each California State Auditor report is free. Additional copies are $5 each. Printed copies of this report can be obtained by contacting: California State Auditor Bureau of State Audits 660 J Street, Suite 300 Sacramento, California 95814 (916)445-0255 or TDD (916)445-0255 x 248 Permission is granted to reproduce reports. C S A ALIFORNIA TATE UDITOR KURT R. SJOBERG MARIANNE P. EVASHENK STATE AUDITOR CHIEF DEPUTY STATE AUDITOR December 9, 1997 96038 The Governor of California President pro Tempore of the Senate Speaker of the Assembly State Capitol Sacramento, California 95814 Dear Governor and Legislative Leaders: As required by Chapter 197, Statutes of 1996, the Bureau of State Audits presents its audit report concerning the drug management techniques of the Department of Health Services Medi-Cal drug contracting program. This report concludes that generally the department(cid:146)s use of drug management techniques is on a par with the HMOs we surveyed. Although it could expand its use of some techniques, it generally employs all those that are suited to the Medi-Cal Program. Respectfully submitted, KURT R. SJOBERG State Auditor BUREAU OF STATE AUDITS 660 J Street, Suite 300, Sacramento, California 95814 Telephone: (916) 445-0255 Fax: (916) 327-0019 Table of Contents Summary S-1 Introduction 1 Analysis The Department of Health Services Uses Many Drug Management Techniques HMOs Employ 5 Recommendations 16 Appendix A Summary of Survey Responses on Drug Management Techniques 17 Appendix B Survey Participants 29 Responses to the Audit Department of Health Services 31 California State Auditor’s Comment on the Response From the Department of Health Services 35 Summary Results in Brief T Audit Highlights . . . he Department of Heath Services (department) is responsible for administering the California Medical Assistance Program (Medi-Cal). Medi-Cal provides a wide We compared the department’s drug array of heath care services, including payment for prescription management techniques to drugs to public assistance recipients and low-income families. those of HMOs and found The department employs a number of drug management that although they are techniques designed to optimize care while minimizing costs. generally on a par, the manner or extent to which Generally, the department’s drug management techniques are the department uses some of on a par with those of Health Maintenance Organizations them may differ. (HMOs). We compared them to those used by 14 HMOs and Specifically, the department: found the department employs 11 of the 14 techniques. Of the þ Uses 11 of the 14 drug 3 it does not employ, 1 is not widely used by the HMOs and management techniques 2 are not applicable to the state program. While the department that HMOs employ. uses most of the same techniques, it does not use some in the same manner or to the same extent as the HMOs. There are þ Has a formulary that is differences in the list of preferred drugs (formulary), drug use comparable in size and reviews, and rebates. range to the HMOs’ formularies but offers The Medi-Cal formulary is comparable to those of HMOs in the fewer of the most number and range of drugs it offers. However, it offers fewer of commonly prescribed the most commonly prescribed medications because the drugs drugs. either cost more than other comparable drugs or are prone to þ Does not employ drug misuse. Nonetheless, if medically necessary, a Medi-Cal use reviews as recipient can obtain these drugs with the department’s approval. extensively as HMOs and does not use them Also, although the department employs drug use reviews, it to identify drugs for does not do so as extensively as the HMOs. Both use on-line possible addition to the computer messages or screens to alert pharmacists of a drug’s formulary. potential adverse effects, but the department screens only a few of the drugs on the Medi-Cal formulary while the HMOs screen þ Has more drugs on its all drugs on their formularies. Additionally, unlike some formulary covered by HMOs, the department does not obtain or review nonformulary rebate agreements but, unlike the HMOs, drug use statistics to identify drugs for possible inclusion on the cannot calculate the formulary. rebate and bill the manufacturers for the amount owed. S-1 Further, the department and most HMOs negotiate rebate agreements with drug manufacturers. However, while the HMOs base their rebates on a price that is published and readily available, the department bases its on a price known only to the drug’s manufacturer. Thus, unlike the department, HMOs can calculate rebates and bill manufacturers for the amount owed. Recommendations The department should continue to expand its use of drug management techniques. Additionally, it should stay abreast of new techniques HMOs and other third-party payers use to manage their prescription benefit plans and consider adopting those methods that are effective and suited to the Medi-Cal program. Finally, the department should calculate state rebates using an available price base. Agency Comments The department concurs with our recommendations and is interested in generating a report to identify high-demand drugs and developing additional step care guidelines. In addition, it expects to add more drug alert screens in the near future and is committed to seek out and implement new drug management techniques when possible. Finally, the department states that it is now able to negotiate rebate agreements using a basis that will allow it to calculate rebates. S-2 Introduction Background T he Department of Health Services (department) is responsible for administering the California Medical Assistance Program (Medi-Cal). Medi-Cal provides a wide array of health care services, including payment for prescription drugs to public assistance recipients and low-income families. Over five million Californians receive Medi-Cal benefits, and most of these participate in the traditional fee-for-service plan. Although Medi-Cal also offers managed care plans, the focus of this report is on the drug management techniques used in the fee-for-service plan. Under the fee-for-service plan, Medi-Cal patients may obtain services or supplies from any physician or pharmacist who has agreed to serve them. The department establishes reimbursement rates and the physician or pharmacist bills it for services or supplies provided to the Medi-Cal patient. Health Maintenance Organizations (HMOs) are the oldest form of managed care plans. They offer members a range of health benefits, including preventive care, for a set monthly fee. The HMO provides patients a list of doctors from which to choose a primary care physician. The primary care physician coordinates the patient’s care, which means the patient must contact his or her doctor to be referred to a specialist. If the patient goes outside the HMO for care without a referral from the plan, he or she may be responsible for the total cost of services. Managed care’s emphasis on primary care is intended, in part, to increase the use of preventive services and thus reduce costs. Two major differences exist between the Medi-Cal fee-for-service and managed care programs. One difference is the amount of physician oversight or management of care. Specifically, though not encouraged, Medi-Cal allows the patient to see a number of physicians. In fact, one physician may not be aware that the patient has sought help elsewhere for a given complaint. In contrast, managed care programs coordinate which physicians patients consult. This integrated approach allows the physicians to be more aware of patient history and facilitates their ability to manage patient health care. 1 Another significant difference between Medi-Cal and managed care programs is the amount of responsibility physicians assume for controlling health care costs. Specifically, while Medi-Cal places reimbursement limits on specific procedures or medical services provided to its patients, physicians assume little responsibility for ensuring that patients receive the most cost-effective health care. In contrast, managed care plans are responsible for providing case management and health maintenance on a capitated per-month fee. If a patient’s health care costs exceed that fee, the plan risks losing money. For example, some managed care plans give physicians a monthly drug budget, penalizing them if they go over it. This “risk sharing” provides physicians an incentive to consider the cost-effectiveness of the drugs they prescribe. The Medi-Cal List of Contract Drugs and Drug Rebates Two of the techniques the department uses to ensure that Medi-Cal fee-for-service patients receive prescription drug benefits that are both therapeutic and cost effective are the Medi-Cal List of Contract Drugs (Medi-Cal formulary) and rebate negotiation with drug manufacturers. A drug formulary is a list of preferred drugs from which a physician can prescribe and for which a pharmacy can seek reimbursement. The department adds drugs to the Medi-Cal formulary in two ways. One method requires a therapeutic category review (TCR) to assess a group of drugs designed to treat a particular symptom. The other calls for an individual drug review. According to the supervising pharmaceutical consultant, the department selects the categories for a TCR based on areas of concern such as cost, usage, and therapeutic value. Although the department may initiate an individual drug review, generally an outside source such as a drug manufacturer initiates it by petitioning the department. Both of these reviews follow the same basic process. First, the department informs drug manufacturers and the Medi-Cal Drug Advisory Committee (committee) that it is conducting a TCR or individual drug review. It requests the committee, which consists mainly of physicians and pharmacists, to evaluate the drugs under consideration. The committee evaluates the drugs using specific criteria, including safety, effectiveness, essential need, misuse potential, and cost. Based on this evaluation, the committee recommends for inclusion on the formulary those drugs it finds are essential to meet the health care needs of Medi-Cal patients. 2 Meanwhile, the department’s staff meet with manufacturers to discuss a drug’s therapeutic aspects and to negotiate rebates. In addition, the department’s pharmacy staff reviews each drug using the same criteria as the committee. In their evaluation, the staff consider the committee’s findings, the manufacturer’s input, and other sources of information, such as clinical studies. They then submit their recommendation for TCRs to the department director, who makes the final decision, or their recommendation for individual drugs to the chief of the department’s Medi-Cal contracting section, who decides. The process is designed to ensure that Medi-Cal patients have access to a range of drug products the department considers both therapeutic and cost effective. The State also receives federal rebates from drug manufacturers in addition to the rebates the department negotiates when adding drugs to the formulary. In January 1991, the federal government implemented a nationwide mandatory drug rebate program. Under this federal program, drug manufacturers are required to submit quarterly rebates directly to states for each drug reimbursed through the medical assistance program, as described in the contract between the manufacturer and the federal government. As a result, all drugs on the Medi-Cal formulary are covered under a federal rebate agreement and some are also covered under a state rebate agreement. Scope and Methodology Chapter 197, Statutes of 1996, requires the Bureau of State Audits (bureau) to compare the drug management techniques of the department’s drug contracting program with those of private sector third-party payers, such as HMOs. To determine how the department manages drug benefits for Medi-Cal recipients in the fee-for-service plan, we interviewed department staff and reviewed laws, regulations, and prior bureau audits. To query the HMOs on general drug management techniques, formularies, and rebate negotiation and collection processes, we designed a drug management technique survey based on interviews with department and HMO pharmacists and a representative from a drug manufacturer interest group. We sent the survey, consisting of 44 questions, to the department and 14 HMOs, including the 9 largest in California. We also asked each HMO in our survey to send us a formulary for analysis. All 14 HMOs completed and returned the survey; 8 provided us with copies of their formularies. From these 3 formularies we selected 3 HMOs, one large (more than 500,000 members), one medium (250,000 to 500,000 members), and one small (fewer than 250,000 members) for comparison to the Medi-Cal formulary. To compare the Medi-Cal formulary to the others, we designed a database and entered the generic name and major therapeutic category for every drug on the formularies. To render the formularies comparable, we did not include over-the-counter medications or drugs requiring prior authorization. We also excluded Medi-Cal formulary drugs that are administered intravenously or which require a health care professional to inject, since the HMOs did not list such drugs. Finally, because the generic drug names varied considerably among the formularies, we standardized drug names to conform with the department’s. Once we eliminated certain drugs and matched others to the correct drug or therapeutic category on the Medi-Cal formulary, we sorted each drug by Medi-Cal therapeutic category. We then counted the drugs under each category and calculated the percentage of Medi-Cal drug matches for the three HMO formularies. Additionally, we compared the percentages and, where the department count differed from the HMO average by more than four drugs, analyzed the assortment of drugs listed to determine why they differed. Finally, we obtained a list of the top 200 brand name drugs prescribed in the United States in 1996. (This list represented only 131 different generic drugs because some generic drugs go by more than one brand name.) Using the generic name, we calculated the percentage included on the department’s and the three HMOf ormularies. 4 Analysis The Department of Health Services Uses Many Drug Management Techniques HMOs Employ Summary T he Department of Health Services (department) generally uses the same drug management techniques for the Medical Assistance Program (Medi-Cal) that health maintenance organizations (HMOs) employ to manage their prescription drug benefits. Our survey of 14 HMOs revealed the department uses 11 of the 14 drug management techniques that HMOs do, although the manner or extent to which the department uses a particular technique may vary. Further, although the department does not currently use three of the techniques the HMOs reported using, one is not widely used. The remaining two are not suited to Medi-Cal’s fee-for-service program. The Department Uses 11 of 14 HMO Drug Management Techniques The department employs a variety of methods to ensure that Medi-Cal recipients in the fee-for-service plan receive drugs that are both therapeutic and cost effective. To determine whether these methods are similar to those HMOs use, we surveyed 14 HMOs in California. We asked each HMO a general question regarding its drug management techniques and more in-depth questions about how it established them. A summary of the survey results is provided in Appendix A, and the HMO survey participants are listed in Appendix B. The HMOs surveyed employ 14 drug management techniques; the department uses 11 of these. Table 1 lists these 14 techniques and shows those the department uses. 5 Table 1 Drug Management Techniques Used by HMOs Used by the Department 1. Drug formulary a 2. Prior authorization process for drugs not listed on the formulary a 3. Step care guidelines or treatment algorithms a 4. Minimum dispensing quantities a 5. Limitations on the frequency of billing a 6. Price ceilings on certain drug ingredients a 7. Maximum allowable cost lists a 8. Generic substitutions a 9. Rebate negotiation with drug manufacturers a 10. Maximum dispensing quantities a 11. Drug use reviews a 12. Limitations on the number of refills a doctor can indicate on a prescription 13. Physician report cards 14. Physician capitations or incentives Of the techniques the department uses, it implements three through the prescribing physician or the pharmacist who fills the prescription and the remaining eight through the pharmacist, through the department itself, or both. Two of the management techniques implemented through the physician or pharmacist are the drug formulary and the prior authorization process for nonformulary drugs. Drug formularies are designed to assist physicians in prescribing medically appropriate, cost-effective drug therapy. For drugs not listed on the formulary, the physician or pharmacist must justify the need for a particular drug over those listed on the formulary and 6 obtain prior authorization. Thus, the prior authorization process allows the physician to deviate from the formulary when medically necessary. The prior authorization process allows the Step care guidelines or treatment algorithms, which stipulate a physician to deviate from certain sequence or order of prescription drug therapy, is the formulary when the third technique implemented through the physician. For medically necessary. example, the recommended treatment for gastroesophageal reflux disease and its associated symptom of heartburn begins with either over-the-counter antacid medications or changes in the patient’s lifestyle. If these steps are not successful, more expensive prescription drug therapy is used. This drug management technique both educates prescribing physicians and controls cost. The guideline typically informs physicians about cost-effective therapy by stipulating the least expensive treatment first; then more expensive therapy is applied as necessary. The department implemented its first step care guideline in October 1997. The department uses an additional five drug management techniques, implemented through the pharmacist who fills the prescription, primarily to contain costs. These techniques include minimum dispensing quantities, limitations on the frequency of billing, price ceilings on certain drug ingredients, maximum allowable cost lists, and generic substitutions. Minimum dispensing quantities and restrictions on frequency of billings limit the amount pharmacists charge to fill the prescriptions. Similarly, price ceilings on certain drug ingredients and maximum allowable costs control expenses by capping the amount pharmacists are reimbursed for the drugs they provide to patients. Finally, generic substitutions further reduce costs by requiring pharmacists to dispense the least expensive generic equivalent that meets the patient’s medical needs. An additional cost-cutting technique shared by the department and the HMOs surveyed is rebate negotiation with drug manufacturers. Like most HMOs, the department does not buy drugs directly from manufacturers. Rather, the patient takes a prescription to a pharmacy, and the department or HMO reimburses the pharmacy for each prescription it fills. Each quarter the department or HMO calculates the type and number of drugs reimbursed through pharmacies and, for each drug covered under a rebate agreement, bills the drug’s manufacturer. This technique is designed to decrease the amount paid for drugs based upon agreements with the various drug manufacturers. 7 The two remaining techniques, maximum dispensing quantities and drug use reviews, are designed to contain costs by protecting the patient against overprescribing by the physician or misuse of prescription drugs by the patient. Maximum Two drug management dispensing quantities limit the number of drugs patients can techniques, maximum receive for a given period. If the patient needs to exceed the dispensing quantities and maximum, the pharmacist must obtain prior authorization to drug use reviews, contain fill the prescription. For such cases, prior authorization requires costs by protecting the the physician or pharmacist to evaluate the patient’s total drug patient against therapy and determine whether the prescription that exceeds the overprescribing by the maximum is therapeutic. physician and misuse of drugs by the patient. Drug use reviews are performed before and after the patient receives a drug. Prospective reviews are performed on-line as the pharmacist fills the prescription. As pharmacists fill prescriptions for drugs, they enter them into their computers, which are connected to the department’s or HMO’s computer system. The computer system compares the prescription to a patient’s history, which might include the patient’s age, gender, and other current prescriptions. If, for example, a prescription reacts adversely to drugs the patient is already taking, the computer system will send back an “alert,” informing the pharmacist. The pharmacist can then contact the prescribing physician and alert him or her to prescribe an alternative medication. This particular drug use review screen is called drug vs. drug interaction. The department and many HMOs have multiple drug alert screens, such as drug vs. pregnancy conflict and drug vs. age conflict, to inform pharmacists of various adverse drug effects. Retrospective reviews, performed by the department or HMO after the patient receives drugs, analyze the number and type of prescriptions. These reviews include analysis of the prescribing, dispensing, and drug use trends to detect potential fraud or abuse by patients and providers and to ensure that prescriptions are appropriate. Prescribing trends can also be used to support decisions regarding a drug’s addition or deletion from the formulary. The Department Does Not Use Three Drug Management Techniques That Some HMOs Employ The department does not use three of the drug management techniques employed by one or more of the HMOs surveyed. All of these techniques are implemented through the prescribing physician. 8 Like most HMOs, the department does not place a limitation on the number of refills the doctor may indicate on a prescription. Limiting refills is designed to ensure that the doctor reevaluates the patient before continuing drug therapy. The department states that this control is not cost-beneficial to the program. Currently it allows the physician to decide on the number of refills and frequency of follow-up visits on a case-by-case basis, rather than specifying a number of refills. The department The department, like most believes that it is less expensive to pay for the prescription refills HMOs, does not limit than to encourage potentially unnecessary office visits. Only refills a doctor may order three of the fourteen HMOs surveyed use this technique. on a prescription and believes this control The remaining two drug management techniques, physician technique is not report cards (or feedback) and physician capitation (budgets or cost-beneficial. limits) and incentives (monetary rewards), are not applicable to the Medi-Cal fee-for-service program. Physician report cards are provided to prescribing physicians by the HMO. The report summarizes and assesses the doctor’s prescribing patterns. Typically, it compares the doctor’s per-patient drug cost to the HMO average, indicating whether the doctor tends to prescribe more expensive drugs than the average doctor. The report may also provide suggestions on how the doctor can improve drug therapy or reduce costs. Physician capitation and incentives are based on an allowance that HMOs give each doctor for each patient. The HMO may monetarily reward doctors who prescribe below this allowance or average. In contrast, the HMO may penalize the doctors who go over this per-patient, per-month allowance. Both of these techniques attempt to minimize prescription drug costs through the physician based on an agreement reached and signed between the doctor and the HMO. Since the department does not contract with physicians for provider status, the Medi-Cal program cannot use report cards, feedback, capitation, and incentives. The Department Could Increase Its Use of Some Drug Management Techniques While the department uses 11 of the 14 techniques described above, it does not use some in the same manner or to the same extent as the HMOs. There are differences in the drug formulary, drug use reviews, and rebates. 9 The Department’s Method of Establishing Its Formulary and Formulary Coverage Is Similar to That of HMOs The department’s process of establishing its formulary is similar to that of HMOs. All of the HMOs in our survey assess individual drugs or categories of drugs for addition to their formulary. In addition, all of them use a drug advisory committee consisting of physicians and pharmacists to aid in deciding whether to add, delete, or retain a drug on the formulary. Finally, both the HMOs and the department use the same criteria to recommend adding drugs to the formulary. The department’s process of adding drugs renders a formulary The department’s that provides coverage much like that of HMOs; however, we formulary coverage is found that the Medi-Cal formulary does not provide as many much like that of HMOs; frequently prescribed drugs that either cost more or are prone to however, the Medi-Cal misuse. In addition, it contains more cancer medications and formulary does not some medications that are not widely used. Table 2 compares provide as many the number of drugs under each major therapeutic category frequently prescribed on the Medi-Cal formulary to that of three HMOs. drugs that either cost Although its total drug count is below the HMO average, the more or are prone to department does not always provide fewer drugs under each of misuse. the various therapeutic categories. Specifically, while the department provides for fewer drugs under four categories, including the central nervous system, gastrointestinal, topical and local preparation, and miscellaneous categories, it provides for more drugs under the anti-infectives, antineoplastics, and ophthalmic preparations categories. In the remaining five therapeutic categories, the department’s offering is not significantly different from the HMO average, within four drugs, of the average HMO count. Generally, the Medi-Cal Formulary Provides as Broad a Range of Drug Therapies as HMOs’ Do When comparing the various drug counts, it is important to note that the number of drugs in a formulary is not as important as the range of drug therapy it provides. A formulary consists of many drugs under the various therapeutic categories and provides a range of drugs from which to choose. For example, in the gastrointestinal category a variety of drugs are used to treat a condition known as gastroesophageal reflux disease (GERD). GERD causes the stomach contents to back up into 10 Table 2 Formulary Drug Counts by Therapeutic Category HMO Drug Therapeutic Category1 Medi-Cal2 HMO 1 HMO 2 HMO 3 Average Anti-infectives3 95 67 83 94 81 Antineoplastic3 34 9 27 14 5 Autonomic4 47 43 48 59 50 Blood modifiers5 3 2 2 3 2 Central nervous system drugs6 78 76 100 114 97 Diuretics and cardiovasculars 59 46 54 83 61 Gastrointestinal drugs 11 17 17 22 19 Hormones 47 44 46 56 49 Metabolic supplements7 10 13 12 16 14 Ophthalmic preparations3 70 48 48 63 53 Topical and local preparations 30 40 56 68 55 Miscellaneous 44 42 57 77 59 Totals 528 443 532 682 Drugs classified under more than one therapeutic category 48 34 37 41 Total Drug Count 480 409 495 641 515 1This table does not include one Medi-Cal therapeutic category because it is composed of medications that must be administered by a health care professional either intravenously or by injection. For this analysis, we eliminated such drugs. 2These drug counts do not include all drugs listed on the Medi-Cal formulary. Specifically, they do not reflect over-the-counter medications or drugs that must be administered by a health care professional either intravenously or by injection. For this analysis, we eliminated approximately 110 such drugs. 3This therapeutic category is described in the text on page 13. 4Autonomic drugs include drugs to treat asthma, vomiting, allergies, and migraines. 5Blood modifiers include drugs that either increase or inhibit coagulation. 6Central nervous system drugs include pain killers, anti-anxiety medications, antidepressants, appetite stimulants, and sedatives. 7Metabolic supplements include calcium, fluoride, potassium, and vitamins. 11 the esophagus, resulting in heartburn. The drugs available to treat GERD can either inhibit the acid production of the stomach or speed up the emptying of the stomach or upper gastrointestinal tract. Both would alleviate the symptom of heartburn using a different mode of treatment. Depending on the individual patient and his or her history, the physician would decide which mode of treatment is appropriate. Thus, a formulary should include both types of treatment to provide a range of drug therapy. For most categories where the department provides fewer drugs, we found that the range of drug therapy provided on the Medi-Cal formulary is generally comparable to that of the HMOs. The department compensates in part for the lower In some categories, the prescription drug counts with over-the-counter alternatives. department compensates None of the HMOs cover over-the-counter medications; thus, if for lower prescription a physician determines that over-the-counter drugs would drug counts with be sufficient to treat a condition, the HMO would not over-the-counter compensate the patient for the drug’s cost. In contrast, alternatives. Medi-Cal covers over-the-counter medications. For example, unlike the HMOs, the department offers and covers many over-the-counter antacid medications in the gastrointestinal category. When the over-the-counter alternatives are added, the Medi-Cal drug count exceeds the HMO average for gastrointestinal drugs, equals the HMO average for miscellaneous drugs, but is still less than the HMO average for topical and local preparations. One reason the Medi-Cal formulary includes fewer central nervous system drugs is that, in selecting drugs for inclusion, the department places greater emphasis on their misuse potential than do the HMOs. For example, the Medi-Cal formulary lists just four of the eight anti-anxiety drugs the HMOs carry. According to the department, when drugs have a high potential for misuse, it may not list them on the formulary. If so, it makes them available through prior authorization. As illustrated by their responses to our survey, the HMOs do not place the same level of importance on a drug’s misuse potential. We asked all participants to indicate the criteria they consider when choosing drugs and to rank the importance of each criterion. The criteria included the drug’s safety, effectiveness, misuse potential, and cost. The department’s ranking of each criterion was similar to the HMOs’, with two exceptions. While the department ranked misuse potential and 12 cost of the drug as very important, the HMOs ranked these as moderately important. The reason the department considers the misuse potential and cost of a drug to be of greater importance than do the HMOs is likely due to the differences between fee-for-service and managed care described in the introduction. The department’s concern with the misuse and cost of a drug In selecting drugs for the also affects the number of most frequently prescribed drugs in the formulary. The Medi-Cal formulary includes 74.8 percent formulary, the department of the 131 medications most frequently prescribed in the United considers the misuse States, compared to an HMO average of 86.8 percent. Fifteen potential and cost of of these top drugs were covered by all three HMO formularies drugs to be of greater but not by Medi-Cal. Specific examples of these drugs included importance than HMOs Claritin (an allergy medication), Vicodin (a pain medication), do. and Resperidone (an antipsychotic medication). When we asked why, the department stated it has added or will add 3 of these 15 drugs, and a fourth is under review. Of the remaining 11, the department said that alternative drugs with lower misuse potential and cost were available on the formulary. In addition, if medically necessary, any of these drugs can be obtained by Medi-Cal patients through prior authorization. Sometimes the Department Offers More Choice Than the HMOs Do In the instances where the department includes more drugs than the HMOs, we found the difference is mostly attributable to laws and regulations governing the Medi-Cal formulary. For example, the Medi-Cal formulary includes more antineoplastic drugs in its category than do the HMOs. The antineoplastics category includes drugs used to treat cancer. State law requires that the Medi-Cal formulary include all drugs approved by the FDA for the treatment of cancer. The anti-infective and ophthalmic categories provide another example. Anti-infectives include antibiotics, antifungals, and drugs used to treat tuberculosis and malaria. The ophthalmic category includes medications used to treat eye conditions. Medi-Cal’s formulary contains drugs not listed by the HMOs and not widely prescribed by physicians. The department states that it has not yet removed these drugs because state law requires it to hold a public hearing to do so. Because a public hearing is time-consuming and other more pressing issues, such as adding new drugs to the formulary, have taken precedence, the department has not yet deleted these drugs from its formulary. Further, although physicians do not frequently prescribe these medications, their inclusion on the formulary poses no threat to Medi-Cal patients or additional cost to the State. When these less frequently prescribed drugs are deleted, 13 Medi-Cal anti-infective and ophthalmic drug counts become more comparable to the HMO average but still exceed the average counts by 10 percent and 15 percent, respectively. The Department Does Not Employ Drug Use Reviews as Extensively as the HMOs Surveyed There are both similarities and differences in the manner in which the department and HMOs employ drug use reviews. Generally, the department does not use prospective and retrospective drug use reviews as extensively as the HMOs. Both the department and the majority of HMOs perform prospective drug reviews using on-line computer messages or screens to alert pharmacists of potential adverse drug effects. While the department has more drug use review screens, it applies these screens to fewer drugs than do the HMOs surveyed. Drug use review screens can alert the pharmacist to many different situations such as a drug vs. drug interaction, The department applies drug vs. pregnancy conflict, drug vs. age conflict, or drug vs. drug use review screens, gender conflict. The department employs a total of 13 different intended to alert drug use review screens and applies these screens to pharmacists to potential approximately 13 percent of the drugs on its formulary. In adverse drug effects, to contrast, the 11 HMOs that use them have an average of only 13 percent of its 6 different screens and 10 apply them to all formulary drugs. formulary. While the department plans to expand its use of screens in the future, it believes that applying the screens to a select group of drugs provides more significant information to the pharmacist. Therefore, the department has decided to limit the application of screens to those drugs that are frequently prescribed or have the most significant adverse treatment potential. The department believes that Medi-Cal patients are best served by this approach. The department, like most HMOs surveyed, performs retrospective reviews that analyze prescribing, dispensing, and drug use trends to detect fraud and abuse by the patient or provider. However, it limits these reviews to the drugs on the formulary. Unlike most of the HMOs surveyed, the department does not use retrospective reviews to identify drugs for possible addition to its formulary. Although the department stated it is aware of the drugs frequently requested through prior authorization, it does not generate reports or analyze prior authorization requests to identify high-demand drugs. Performing such an analysis would be useful, as adding 14 high-demand drugs to the formulary eliminates the cost of processing multiple prior authorizations. Costs can be reduced further if the department negotiates a rebate with the drug’s manufacturer. The Department Does Not Calculate Rebates the Same Way as HMOs Like the department, the majority of HMOs surveyed negotiate with drug manufacturers to receive rebates on the drugs they purchase through pharmacies. However, the department uses a different basis to calculate its rebate amounts. Of the 14 HMOs surveyed, 11 negotiate for rebates with drug manufacturers. The number of drugs covered under rebate agreements ranges from 1.5 percent to 50 percent of all drugs on the formulary. In contrast, each drug on the Medi-Cal formulary is covered under a federal rebate agreement, and approximately 17 percent of these have additional state rebate agreements. Rebates are calculated using an agreed-upon formula. The rebate is usually a percentage of the average cost of a drug somewhere between the manufacturer’s price and the wholesaler’s charge to pharmacies. We asked the department and the various HMOs what price they use to calculate the rebate amount. Only the department reported using the average manufacturer’s price as the primary basis of calculating the rebate amounts. In a previous report entitled, “Department of Health Services Has Not Collected $40 Million in Supplemental Rebates from Drug Manufacturers,” issued by the Bureau of State Audits in March 1996, we found that the average manufacturer’s price is an amount known only to the drug’s manufacturer. Thus, when the department bills the drug manufacturer for the state rebate, it does not stipulate a total amount but provides the manufacturer with the number of Unlike the department, drugs reimbursed through pharmacies so the manufacturer HMOs are able to can calculate and remit the rebate. Our previous report calculate rebates and bill recommended that another basis be used so the department can the manufacturers for the calculate and bill for the rebate amounts itself, thus increasing amount owed. the likelihood of payment and facilitating collection efforts. Our survey revealed that while the HMOs use a variety of prices to calculate rebate amounts, most of these can be obtained and verified by an independent source. For example, 10 of the 11 HMOs who negotiate rebates reported using the 15 average wholesale price, a price published and updated by sources independent of the drug’s manufacturer. Thus, unlike the department, HMOs are able to calculate rebates and bill the manufacturers for the amount owed. Recommendations The department should continue to expand its use of drug management techniques. Specifically, it should consider broadening its use of retrospective reviews to include identifying drugs for inclusion on the formulary. It should also consider increasing its use of alert screens and step care guidelines. Additionally, it should stay abreast of new techniques HMOs and other third-party payers use to manage their prescription benefit plans and consider adopting those methods that are effective and suited to the Medi-Cal program. Finally, the department should base state rebates on a price that is available so it can calculate rebates and bill manufacturers for specific amounts. We conducted this review under the authority vested in the California State Auditor by Section 8543 et seq. of the California Government Code and according to generally accepted government auditing standards. We limited our review to those areas specified in the audit scope of this report. Respectfully submitted, KURT R. SJOBERG State Auditor Date: December 9, 1997 Staff: Sylvia L. Hensley, CPA Kathleen M. Sergeant, CPA 16 Appendix A Summary of Survey Responses on Drug Management Techniques Number of HMOs Department of Health Services (Department) Yes/No Yes No Utilization tools: 1. Which of the following drug utilization tools does your HMO use? Open drug formulary1 No 12 13 Restricted drug formulary3 Yes 14 0 Maximum number of refills per prescription No 3 11 Minimum dispensing quantities Yes 2 12 Maximum dispensing quantities Yes 13 1 Limitations on the frequency of billing Yes 7 7 Price ceilings on certain drug ingredients Yes 8 6 Maximum allowable costs lists Yes 13 1 Generic substitutions Yes 14 0 Step care guidelines or treatment algorithms No4 12 2 Prior authorization process for drugs not on the formulary Yes 12 2 Drug use reviews Yes 13 1 Physician report cards or feedback No 13 1 Physician capitation or incentives No 6 8 Other No 0 14 1An open drug formulary allows physicians to deviate from the list of drugs without obtaining prior authorization. 2One HMO indicated that it had both an open formulary and a restricted formulary depending on the health plan the member selected. 3A restricted drug formulary generally requires the physician to obtain prior authorization from the HMO or department before prescribing drugs not listed on the formulary. All 14 of the HMOs in our survey had some form of restricted formulary: 12 required the physician to obtain prior authorization before prescribing a drug not listed on the formulary; 1 allowed the physician to override the formulary using a special prescription form; and 1 allowed the patient to receive nonformulary drugs at a higher co-payment. 4The department issued its first step care guideline in October 1997. 17 Number of HMOs Department Yes/No Yes No Formulary process: 2. Do you use a pharmacy benefit management (PBM) division or company? No 10 4 3. Who ultimately decides which drugs are added to or deleted from the formulary? Department or HMO Yes 3 11 Committee No 9 5 Joint decision between committee and HMO or PBM No 2 12 4. Do you use an advisory committee in making decisions about a drug’s inclusion in the formulary? (If yes, please answer questions 5, 6, and 7; if no, skip to question 8.) Yes 14 0 Department HMO Numbers Number 5. What is the composition of your drug advisory committee? Please indicate the number of each of the following: Physicians 3 7 HMOs had 4-10; 5 HMOs had 12-18; 1 HMO had 20-30; 1 HMO stated “varies” Pharmacists 2 10 HMOs had 2-4; 3 HMOs had 5-7; 1 HMO stated “varies” Registered nurses 0 3 HMOs had 1-2 Other 1-School of 1 HMO indicated ad hoc—general Pharmacy council representative; 1-Medi-Cal beneficiary 6. Which committee members, if any, are employed by your None Responses ranged from none to all organization? 7. How often does your drug advisory committee meet? Approximately 6 11 HMOs indicated quarterly; times a year 2, bi-monthly; 1, monthly 18 Department Percentages HMO Percentages 8. When drugs are considered for addition to the formulary, what percentage are initiated by: Drug manufacturers 20% 5 HMOs indicated drug manufacturers: 4 HMOs at 10%; 1 at 50% Provider physicians 3% 13 HMOs indicated provider physicians: 8 HMOs at 2-10%; 1 at 30%; 1 at 50%; 3 at 70-90% PBM personnel 0% 7 HMOs indicated PBM personnel: 1 HMO at 15%; 1 at 50%; 5 at 80-100% Provider pharmacists 2% 7 HMOs indicated provider pharmacists: 4 at 1-5%; 2 at 10%; 1 at 20% Other 75% 5 HMOs indicated other: department staff 1 indicated 90% utilization 1 indicated 15% plan staff 1 indicated 90% product evaluation pharmacists 1 indicated 80% therapeutic category reviews 1 indicated 80% HMO pharmacists HMOs Department Yes/No Yes No 9. When considering drugs for addition to the formulary, does your organization typically assess Individual drugs? Yes 12 2 Combination of drugs under a therapeutic category? Yes 6 8 19 Rank by Number of Department HMOs Ranking 10. When drugs are considered for addition to the formulary, what criteria is examined? (Please rank each of the following criteria from 1, very important; to 5, least important; or 0, not considered.) 1 13 1 Safety 1 2 Effectiveness 1 14 1 Essential need 1 5 1 9 2 Misuse potential 1 1 1 3 2 7 3 2 4 1 5 Patient quality of life 2 2 1 7 2 4 3 1 4 Cost of the drug 1 5 2 4 3 5 4 Drug’s effect on doctor’s office visits 2 3 2 7 3 1 4 2 5 1 0 Drug’s effect on hospitalization costs 2 1 1 6 2 4 3 1 4 1 5 1 0 Required lab tests 2 1 2 10 3 1 4 1 5 1 0 Side effects 1 10 1 3 2 1 3 Other 0 25 5 One considers utilization and state regulations and the other considers comparisons to equivalent products on the formulary. 20 HMOs Department Yes/No Yes No 11. When analyzing the above criteria, do you use drug monographs6 produced by the: Drug’s manufacturer Yes 5 9 Independent source Yes 13 1 Department HMOs 12. How often is your formulary updated? Monthly 9 HMOs update quarterly; 1, biennially; 2, as needed; 2, continuously 13. How is the formulary information communicated to Physicians and All HMOs indicated that their physicians, pharmacists, and members? pharmacists by formularies are mailed or faxed to Medi-Cal provider provider physicians. Some, 6 of bulletins. 14, notify members of changes to Beneficiaries are the formulary. notified only when drugs are removed from the formulary. Formulary composition: 14. How many drugs are on your formulary? Approximately 600 Varied—low 550; high 1,400 7 HMOs Department Yes/No Yes No 15. What types of drugs are included on your formulary? (Check all that apply.) Over-the-counter Yes 5 9 Prescription Yes 14 0 Inpatient No 1 13 Outpatient Yes 14 0 Injectables Yes 6 8 Diabetic supplies Yes 11 3 16. Does your formulary include any investigational or experimental drugs? No 0 14 6Drug monographs are detailed descriptions of a particular drug and include its chemical composition, treatment indications, side effects, and may include the results of clinical studies. 7Variations in drug counts are partly attributable to differences in how HMOs and the department count drugs. Many HMOs count the various dosage forms and strengths as separate drugs, while the department counts each generic drug name just once. 21 Department HMOs 17. What is the process for adding drugs recently (1) Petition by the Responses varied. Most indicated that approved by the federal Food and Drug manufacturer to their drug advisory committees review Administration (FDA) to the formulary? the department drugs recently approved by the FDA for addition before they add the drugs to their to the formulary. formularies. (2) Review by 1 indicated that most new FDA drugs outside advisory are automatically added the first 6 committee, months, then utilization information is the California reviewed for a formulary status Medical decision. Association, and California In contrast, another indicated that a Pharmacists drug is not considered until 6 months Association. following FDA approval, then utilization data is reviewed to see if it (3) Department should be added to the formulary. pharmacist and negotiator meet with the manufacturer. (4) Evaluation and decision by the department. (5) If decision is made to add the drug, a price rebate contract between the department and the manufacturer is negotiated and secured. (6) After the department obtains signed contracts, the drug is added to the formulary. 22 Department HMOs 18. When drugs recently approved by the FDA are considered for inclusion on the formulary, what percentage is initiated by: Drug manufacturers 90% 5 HMOs indicated drug manufacturers: 1 indicted 5%; 3 indicated 10%; 1 indicated 30% Provider physicians 0% 12 HMOs indicated provider physicians: 7 indicated 2-15%; 2 indicated 50%; 3 indicated 70-80% PBM personnel 0% 7 HMOs indicated PBM personnel: 1 indicated 15%; 1 indicated 50%; 5 indicated 80-100% Provider pharmacists 0% 7 HMOs indicated provider pharmacist: 1 indicated 1%; 5 indicated 5-10%; 1 indicated 20% Other 10% 5 HMOs indicated other: Self-initiated by 1 indicated 90% utilization department staff. 1 indicated 15% plan staff 1 indicated 98% product evaluation pharmacists 1 indicated 100% internal review 1 indicated 80% medical directors and pharmacists HMOs Department Yes/No Yes No 19. Does your HMO have established procedures for considering drugs previously approved by the FDA and previously considered for addition to your formulary but which have new treatment indications, dosage strengths, Yes 11 3 or forms? Generally, the 6 of the 14 HMOs stated manufacturer must that new dosage forms are petition the department to treated as line extensions consider new indications, and are automatically dosage strengths, or covered if the drug is on the forms. If the department formulary. previously denied the drug‘s addition, generally 11 indicated that if it is a it will accept a new new treatment indication, petition from the the drug would be reviewed manufacturer when there and treated like a new drug. is significant new clinical information. 23 Department HMOs 20. Are any types of drugs, for example, AIDS or cancer AIDS and cancer drugs. 10 of the 14 HMOs drugs, automatically added to your formulary? automatically add AIDS and/or cancer drugs. 21. How many therapeutic categories does your formulary 13 - Major Varied—low 8, high 145 have? 125 - Subtherapeutic categories 22. How are these therapeutic categories established or By a combination of Varied—6 of the 14 defined? therapeutic uses and indicated they used the pharmacological American Hospital classifications. Formulary Services as a basis. The prescriber or the 12 of the 14 HMOs Beneficiary formulary restrictions: dispensing pharmacist indicated that the 23. If a doctor prescribes a drug not on the formulary, what must obtain prior prescribing physician options does the beneficiary have in obtaining the drug as authorization from the could seek prior a covered benefit? department. If the prior authorization; authorization request is 5 of 14 stated that the denied, the provider can beneficiary could pay for appeal the decision. The the drug or pay a higher beneficiary has the right to co-payment; 3 of 14 a fair hearing for final stated the beneficiary had determination of the prior the option to appeal the authorization request. decision. Number of HMOs Department Yes/No Yes No 24. Are on-line National Drug Code lockouts8 used at the pharmacy to enforce the formulary? Yes 13 1 25. Does your organization have a prior authorization process for drugs not included on the formulary but prescribed by a physician? (If yes, please answer questions 26 and 27; if no, skip to question 28.) Yes 12 29 Note: 12 of the 14 HMOs answered questions 26 and 27. Department Number of HMOs 26. On average, how long does the prior authorization take? 24 hours or less 9 indicated 24 hours or less 2 indicated 24-48 hours 1 indicated 1-3 days 27. On average, what percentage of the prior authorization 85% 3 indicated 50-65% requests are approved? 5 indicated 70-80% 4 indicated 80-98% 8These alert pharmacists that the drug is not on the formulary. 9One of the two HMOs allows physicians to override the formulary at their discretion; the other allows the patient to receive the drug only at a higher co-payment. 24 Number of HMOs Department Yes/No Yes No 28. Does your organization have an on-line process to review drug utilization at the point of sale? (For example, drug/drug interactions.) (If yes, please answer questions 29 and 30; if no, skip to question 31.) Yes 11 3 Note: 11 of the 14 HMOs answered questions 29 and 30. Department HMOs 29. How many or what percent of the drugs in your formulary 13% 10 indicated 100%; 1 are covered under this prospective utilization process? indicated 0.1% 30. What type of drug utilization screens are included in this Drug/drug interaction All had drug/drug process (drug/drug interaction, drug/disease conflict)? Drug/disease conflict interaction screens. The Please provide a list of the various screens used by your Therapeutic, or number of screens each organization. pharmacologic duplication had ranged from 1 to 10, Ingredient duplication with an average of 5.6. Incorrect drug dosage Incorrect duration of treatment Drug/allergy conflict Underutilization Overutilization Clinical misuse/addictive toxicity Drug/age conflict Drug/gender conflict Drug/pregnancy conflict Number of HMOs Department Yes/No Yes No 31. Does your organization review the use of formulary drugs retrospectively, or after the fact? Yes 13 1 32. Are the retrospective reviews used in considering a drug’s addition to or deletion from the formulary? No 11 3 33. Are the retrospective reviews used to determine potential fraud or abuse? Yes 13 1 Note: 11 of the 14 HMOs answered question 34; 12 answered question 35. 25 Department HMOs 34. What was your per-member, per-month (PMPM) cost in $28.5910 $ 8.54 low 1996? $16.07 high $11.81 average 35. What was your number of prescriptions per member, per 911 5.0 low year (RxPMPY) in 1996? 7.6 high 6.0 average Number of HMOs Department Yes/No Yes No Rebate negotiations with drug manufacturers: 36. From which of the following does your organization purchase drugs? Drug manufacturers No 2 12 Pharmacies Yes 13 1 Wholesalers No 1 13 37. Does your organization negotiate rebates with drug manufacturers? (If yes, please answer questions 38 through 44; if no, skip to 45.) Yes 11 3 Note: 11 of the 14 HMOs answered questions 38 - 44. Department Number of Percentage HMOs 38. What percentage of drugs on your formulary are covered 100%12 1 indicated 1.5% under a rebate agreement? 1 indicated 5% 4 indicated 20-30% 5 indicated 40-50% 10 The department’s PMPM is more than the HMOs’, due in part to 2 factors. First, the department charges a small ($1) or ncoo -payment for each prescription while HMOs generally charge $5 or more per prescription. Second, the department’s number of prescriptions per member per year is 50 percent higher than the HMO average. 11 The department’sR xPMPY is driven up, in part, by over-the-counter medications covered by the department but not by the HMOs. 12 All Medi-Cal formulary drugs are covered under a rebate agreement negotiated by the federal government. Further, 17 percent of all formulary drugs are also covered by agreements negotiated by the department. 26 HMOs Department Yes/No Yes No 39. What basis is used for calculating the rebate amount? (Check all that apply.) Average Manufacturer’s Price (AMP1)3 Yes 1 10 Average Wholesale Price (AWP) 14 No 10 1 “Best Price”15 Yes 8 3 Wholesaler’s Acquisition Cost (WAC )16 No 7 4 Other No 317 8 Department HMOs 40. How often are the rebates calculated and drug manufacturers billed? Quarterly 11 indicated quarterly 41. How are billing disputes handled? Through cooperative and Varied—3 indicated negotiated review between arbitration; others manufacturers and the indicated “it’s never department of paid Medi- happened,” “handled by Cal claims data and audits our PBM,” or “formal of provider records. process per contract terms.” Number of HMOs Department Yes/No Yes No 42. Do you offer drug manufacturers incentives for prompt No 0 11 payment? Department HMOs 43. If a drug manufacturer fails to pay a rebate, what action The department notifies Varied—4 indicated that it does your organization take? manufacturers and applies has never happened; the federal interest penalty. others indicated they would either take legal action, arbitrate, or terminate the contract. 13AMP is the average price drug manufacturers charge wholesalers for drugs distributed to pharmacies. This amount is determined by the drug’s manufacturer and reported to the federal government. 14 AWP is the average price pharmacies pay to wholesalers for a particular drug. These prices are published by sources independent of the drug’s manufacturer. 15 “Best price” is the negotiated price or the manufacturer’s lowest price available to any class of trade organization or entity. 16 WAC is the amount wholesalers pay manufactures for a drug at a particular point in time. 17 One HMO indicated distributor list price; one, volume discounts and market share incentives; and one, the director catalog price. 27 Number of HMOs Department Yes/No Yes No 44. Are drugs ever suspended from the formulary based on a manufacturer’s failure to pay rebates? Yes 1 10 28 Appendix B Survey Participants Aetna Health Plans of California, Inc.* Blue Shield of California* Blue Cross of California* CIGNA Health Care of California Foundation Health* Health Net Health Plan of the Redwoods Kaiser Permanente* Lifeguard, Inc. Maxicare* National Health Plans* Omni Healthcare PacifiCare of California Prudential HealthCare* * These HMOs provided a copy of their formularies. 29 Blank page inserted for reproduction purposes only 30 State of California Department of Health Services M e m o r a n d u m Date: November 25, 1997 To: Kurt R. Sjoberg State Auditor 600 J Street, Suite 300 From: Director(cid:146)s Office 714 P Street, Room 1253 657-1425 Subject: Report :Department of Health Services: Its Drug Management Techniques are Similar to Those of Health Maintenance Organizations This memorandum is in response to your draft report entitled, (cid:147)Department of Health Services: * Its Drug Management Techniques Are Similar to Those of Health Maintenance Organizations.(cid:148) Thank you for the opportunity to review and comment on the draft. After reviewing the draft audit report, the Department of Health Services (DHS) found no significant concerns with regard to its contents. However, we have the following comments on the recommendations (recommendations are shown in italics) made in the report: • DHS should consider broadening its use of retrospective reviews to include identifying drugs for inclusion on the formulary. We concur: DHS has always relied on both direct communication with the Medi-Cal field offices and findings from annual on-site field office reviews to determine the need for new drug additions to the formulary from the provider community(cid:146)s point of view. While this method provides DHS with ongoing information in terms of requests for nonformulary drugs, it is our belief that a report generated specifically for the purpose of identifying high-demand drugs would be helpful. Therefore, we intend on following up on this course of action. • DHS should consider increasing its use of alert screens associated with prospective Drug Use Review (DUR). We concur: We would like to emphasize the fact that DHS provides a relatively detailed use of DUR alert screens by utilizing 13 different DUR screens to a designated group of high volume and clinically important drug compared to the health maintenance organization(cid:146)s (HMO(cid:146)s) use of an average of 6 screens and applies them to all drugs on their formulary. We believe applying the screens to a select group of drugs provides more significant information to the dispensing pharmacist. Applying the screens to all 31 *The California State Auditor(cid:146)s comments on this reponse start on page 35. Kurt R. Sjoberg Page 2 drugs would duplicate existing software programs that pharmacies currently utilize. However, the DUR Board is currently evaluating the possibility of expanding the list of target drugs which can trigger the use of the alert screens. As a result of the Board(cid:146)s evaluation, we anticipate expanding this list in the near future. • DHS should consider increasing the use of step care guidelines. We concur: Recent publication of our step care guidelines on gastroesophageal reflux disease has resulted in many inquiries regarding the possibility of developing additional step care guidelines for other disease states. DHS remains interested in pursuing this possibility for selected disease states . • DHS should stay abreast of new techniques HMO(cid:146)s and other third party payers use to manage their prescription benefit plans and consider adopting those methods that are effective and suited to the Medi-Cal program. We concur: DHS, as a drug investment manager, is committed to seek out drug management techniques employed in the private sector to optimize drug utilization while controlling costs in Medi-Cal. To the extent possible, new techniques will be implemented to accomplish these goals. • DHS should base state rebates on a price that is available so it can calculate rebates and bill manufacturers for specific amounts. We concur in principle: The audit correctly identifies the fact that DHS does not calculate rebates the same way as the majority of HMOs. The reason for this is because rebates paid to states through the federal rebate program have always been based on the (cid:147)average manufacturer price(cid:148) (AMP) which is defined in federal statute and supplied by manufacturers to the federal Health Care Financing Administration. Despite requests by the DHS, HCFA will not release the AMP to DHS. Also, up until December 1996, state law required the mandatory state supplemental rebates to be calculated based on AMP. However, since the mandatory rebates have expired and recently DHS has begun negotiating drug rebate agreements with manufacturers that would allow the rebate to be calculated without the AMP, DHS believes this recommendation probably could be implemented without significant additional workload impact. In addition, as previously indicated to your staff by DHS, we question the relevance of the information regarding the percentage of drugs on the formulary that have state supplemental rebate agreements. We believe that it would be more relevant to compare the HMO(cid:146)s total drug 32 Kurt R. Sjoberg Page 3 expenditures less rebates as compared to that same calculation for DHS. However, it is our understanding that HMOs may not have been willing to share such information. Also, we believe that the percentage expressed as the percentage of all drugs on the formulary is misleading. For example, if the analysis were limited to the percentage of single-source drugs added in the last year that have additional state rebate agreements, the percentage would be significantly higher (nearly 96 percent) than when expressed as a percentage of all drugs on the Medi-Cal formulary. Unlike most HMOs, the Medi-Cal formulary includes over-the-counter drugs which typically are already relatively inexpensive compared to single-source drugs and for which DHS does not typically get supplemental rebates. Also, we wish to emphasize the fact that due to federal law, manufacturers are required to give states the best price available to any other purchaser. So, although some HMOs may appear to secure a higher percentage of rebates than DHS secures in state supplemental rebates, they cannot get a better price than DHS already gets through the federal rebate program. Again, thank you for your unbiased review of drug management techniques. We look forward to the final report. If you have any questions, please contact Mr. Joseph A. Kelly, Chief, Medi-Cal Policy Division, at (916) 657-1542. Barbara Hooker S. Kimberly BelshØ FOR Director 33 Blank page inserted for reproduction purposes only 34 Comment California State Auditor’s Comment on the Response From the Department of Health Services T o provide clarity and perspective, we are commenting on the Department of Health Services’ (department) response to our audit report. The number corresponds to the number we have placed in the response. To determine how extensively they use rebates, we asked the department and each of the HMOs in our survey the percentage of drugs on their formularies covered by rebate agreements. We find it interesting that the department questions the relevance of the state supplemental rebate percentage since we did not specifically request such information. However, because the department included both the percentage of drugs covered under federal rebates and the percentage covered by state rebates in its response to our questionnaire, we published them. We believe our question and use of the data are appropriate and relevant. 35 cc: Members of the Legislature Office of the Lieutenant Governor Attorney General State Controller Legislative Analyst Assembly Office of Research Senate Office of Research Assembly Majority/Minority Consultants Senate Majority/Minority Consultants Capitol Press Corps