WASHINGTON — The Medicaid health insurance program for low-income and disabled people is overpaying for prescription drugs by hundreds of millions or even billions of dollars a year, according to three inspector general reports to be released today.
Government pricing formulas intended to keep prescription costs in check have had the opposite effect, the reports found, resulting in payments that exceeded the market prices for thousands of prescriptions.
For example, when the government used generic drugs to save money, it still paid more for them than it had to. Eliminating overpayment for generics could save as much as $1.2 billion a year, one of the reports estimated.
Auditors looked at the 20 generic drugs on which Medicaid spent the most. For the third quarter of 2004 -- July through September -- Medicaid spent about $141 million on the medications. What the government paid was so far above prevailing market prices at the time that, if it had paid the market price plus a 50% markup, it would have saved more than half that amount, or $78 million, one of the reports concluded.
The full amount of Medicaid waste is unknowable, congressional staffers said, because federal oversight of the program has been lax.
Senate Finance Committee Chairman Sen. Charles E. Grassley (R-Iowa) said Tuesday that Medicaid could save $4 billion over five years by overhauling a drug payment formula based on published price lists -- not going market rates.
The reports by the Health and Human Services inspector general's office were prepared for the committee, which today is holding the second of two hearings on alleged Medicaid waste, fraud and abuse. The Los Angeles Times obtained copies.
Medicaid is a federal-state partnership that has become the nation's largest health insurer, providing coverage for an estimated 53 million Americans. Its beneficiaries include people with AIDS, children in low-income working families and Alzheimer's patients in nursing homes.
Prescription drugs account for about 14% of the estimated $329 billion in annual Medicaid spending, or well over $30 billion.
Overpayment is an especially crucial issue because the budget passed by Congress calls for slowing the growth of Medicaid by $10 billion over five years. Lawmakers are seeking ways to do that without cutting program rolls, an alternative that has proved unpopular with governors in both parties and could inflict hardships on vulnerable patients.
"We should be able to find savings in the Medicaid program without affecting coverage," Grassley said. "We know we're overpaying for drugs."
Some witnesses at the committee's first hearing Tuesday described Medicaid as a fiscal sinkhole that did not receive as much scrutiny as its companion, the Medicare health program for the elderly.
The Centers for Medicare and Medicaid Services has the equivalent of eight full-time employees assigned to oversee state efforts to counter fraud and abuse, the congressional Government Accountability Office told the committee.
"Medicaid fraud and abuse control activities remain out of balance with the amount of federal dollars spent annually to provide Medicaid benefits," said Leslie G. Aronovitz, the GAO's healthcare director.
A Medicaid official said that overlooked the fact that dozens of investigators at other agencies, such as state fraud control units, police the program.
Outright fraud by drug companies against Medicaid -- as distinct from the problem with overpayments -- could also run into the billions of dollars, testified James W. Moorman, president of Taxpayers Against Fraud, a nonprofit group backed by lawyers who represented corporate whistle-blowers.
Moorman said his group estimated that there could be as many as 200 to 250 pending federal and state lawsuits against drug manufacturers alleged to have cheated Medicaid. The total value of claims could be as high as $25 billion, he testified.
The lawsuits have been brought under the federal False Claims Act and similar state laws, which allow whistle-blowers to keep a portion of any funds recovered by the government.
The inspector general reports described a Medicaid payment formula that could be compared to buying a new car at the manufacturer's list price, plus an additional allowance for dealer profit.
"Changing the basis of Medicaid reimbursement could have a significant impact on Medicaid expenditures," said one of the reports. It found "substantial disparities" between the prices based on actual sales of medications and the list prices used to calculate Medicaid payments.
Auditors for the inspector general compared the listed wholesale prices for thousands of drugs with the actual market prices paid by wholesalers that supplied pharmacies. Most of the drugs that Medicaid pays for are dispensed by pharmacies. Until recently, the government did not have access to the market prices.
For 98% of medications, the Medicaid payment was higher than the average market price that drug makers got from wholesalers, auditors found.