Senate Panel Targets Drug Firms’ Medicaid Price Policies

Times Staff Writer

A Senate committee will launch an investigation today to determine whether drug manufacturers overcharged the state-federal Medicaid program for outpatient prescription drugs.

Sen. Charles E. Grassley (R-Iowa), chairman of the Senate Finance Committee, and the panel’s top Democrat, Sen. Max Baucus of Montana, wrote a letter to 19 of the nation’s 20 largest drug companies demanding that they submit, by May 7, substantial documentation on their Medicaid drug pricing policies.

“These practices could undermine the purposes of [federal law] and may be costing taxpayers hundreds of millions of dollars through reduced ... rebates,” the committee said in its letter to the firms. A copy of the letter, which is to be sent to the companies this morning, was made available Wednesday to the Los Angeles Times.

If allegations by California Atty. Gen. Bill Lockyer are any gauge, the national total of overcharges could be much higher. Lockyer alleged last week that two firms -- Abbott Laboratories and Wyeth Pharmaceuticals Inc. -- had defrauded the state’s Medicaid program, Medi-Cal, of hundreds of millions of dollars.


Medicaid drug-pricing policy is arcane, but its bottom-line effect on state budgets and the availability of healthcare for more than 42 million of the nation’s poorest residents is not.

Medicaid spending on outpatient prescription drugs has increased roughly 14% a year over the last three years, to $27.5 billion last year, according to the Kaiser Commission on Medicaid and the Uninsured.

As a result of increased Medicaid spending and budget shortfalls, 45 states reduced the drug benefits they provided to the elderly, the disabled and other low-income patients since 2001, the letter said.

The Finance Committee’s investigation will focus on the prices Medicaid pays for medications in the eight bestselling classes of prescription drugs, including cholesterol-lowering drugs, ulcer drugs, antidepressants and anti-inflammatories.


Since 1990, federal law has required drug manufacturers wanting to sell their products to Medicaid patients to participate in a so-called rebate program.

The program is designed to work like this: A pharmacy sends Medicaid a bill for a specific drug, and Medicaid pays the pharmacy. Every quarter, Medicaid collects pricing data from the manufacturer to determine the average price it charged hospitals, pharmacies, nursing homes and other buyers for the drug or the best price at which it sold the drug. If the price Medicaid paid was higher than the average or best price, the manufacturer must pay Medicaid the difference.

But Congress created an exception to the “best price” policy to encourage manufacturers to provide certain charitable groups with certain drugs at particularly low prices -- birth-control pills to Planned Parenthood, for example. Under this “nominal price exception,” the price of those drugs would not be factored into the best or average price when determining rebates.

But indications are that some drug firms may be selling far more than a nominal amount of their products to charities or hospitals at these artificially low prices to increase their market share of outpatient sales. Increased nominal pricing could also raise the best or average price of a drug, lowering the amount of rebates firms would have to pay to Medicaid.

“The question is, are drug companies abiding by both the letter and spirit of the law with regard to this [nominal pricing] exception?” Grassley asked Wednesday in a statement.

A pending federal lawsuit alleges that Merck gave hospitals and nursing homes substantial discounts on the heartburn drug Pepcid to increase its outpatient sales, but charged the government as much as 16 times more.

Merck spokesman Christopher Loder said Wednesday that the lawsuit, filed by New Orleans physician William St. John LaCorte, was “wholly without merit.” Noting that Merck officials had not yet received notice of the Finance Committee’s investigation, Loder said his company’s Medicaid “pricing practices are consistent with all laws and regulations.”