Statement of National Association of Chain Drug Stores, Alexandria, Virginia

Mr. Chairman and Members of the Subcommittee. The National Association of Chain Drug Stores (NACDS) appreciates the opportunity to submit a statement for the record regarding reform of the Health Care Financing Administration (HCFA), and the agency's major programs, policies, and operations.

We hope that this review will result in a more streamlined administration of the Medicare, Medicaid and S-CHIP programs, and improve the quality of health care delivered to these programs' beneficiaries, eliminate the onerous bureaucracy at the agency, and modernize HCFA's infrastructure. We support your goals, and pledge to work with you to see that the agency begins the process of being more responsive to the needs of beneficiaries and providers.

NACDS represents about 170 chain pharmacy companies that operate about 33,000 retail pharmacies all across the United States. Chain pharmacy is the single largest segment of pharmacy practice. We filled about 60 percent of the 3.1 billion prescriptions provided across the nation last year. Chain community pharmacy has extensive interaction with programs that are administered by HCFA, and is significantly affected by the agency's policies and procedures. Thus, we have a vested interest in the outcome of any major HCFA review and restructuring. Here's how community retail pharmacy participates in these programs.

• Medicaid: Community retail pharmacies provide prescription services to millions of Medicaid recipients each year. In fact about 15 percent of all retail pharmacy prescriptions are paid for by Medicaid. Even though many specific Medicaid policies are controlled by states, HCFA has an important role in setting and enforcing broad policies and procedures through Federal law, regulation, and the state plan amendment (SPA) process. For example, HCFA sets maximum Medicaid reimbursement rates for generic drugs through their Federal Upper Limit (FUL) program, which can have a significant impact on the utilization of lower-cost generic drugs throughout the entire market. All providers, including pharmacies, are significantly affected by state-based waivers approved by HCFA, including those that expand health care services to low-income populations that are not traditionally Medicaid recipients. We will elaborate more on this and other Medicaid program issues later in this statement.

• Medicare: While Medicare does not yet have a prescription drug benefit, many community pharmacies already serve as suppliers of Medicare-covered items. For example, pharmacies provide select prescription drugs, such as immunosuppressive and oral cancer drugs; provide durable medical equipment, such as canes, walkers, crutches and ostomy supplies; and provide important diabetic care items, such as test strips and glucose meters. Upon enactment of a prescription drug benefit for seniors, HCFA may have some role in the administration of the benefit. Policies and procedures adopted by HCFA in this regard will have a substantial impact on chain community pharmacy.

• State-Based Children Health Insurance Program: Community pharmacies also provide prescription drugs to parents and children enrolled in state S-CHIP programs.

We appreciate the responsiveness of many HCFA staff to our ongoing questions and concerns regarding the operations of these programs. However, we wanted to offer our perspectives on how we believe the agency can improve the administration of certain programs under its jurisdiction to make them more valuable for patients, reduce costs for the system, and facilitate participation of pharmacy providers.

Medicaid Prescription Copays

Some states impose prescription copays as a way of reducing their Medicaid prescription drug expenditures. While these copays only range from 50 cents to $3 per prescription (and some eligible groups are exempted from paying these copays), they can create burdens on Medicaid recipients with limited means, especially those taking multiple prescriptions. Sometimes, the recipient cannot afford the copay, but the pharmacist is obligated under law to provide the prescription anyway. In some states, however, recipients are being actively told to just say that they cannot afford the copay, and that the pharmacist will still have to provide the prescription. HCFA has restricted states' ability to compensate pharmacies for these uncollected copays.

This is unfair to pharmacies, and essentially represents a reimbursement reduction, since the state is not allowed by HCFA to compensate the pharmacist for the value of the uncollected copays. In addition, these unpaid copays represent unfunded mandates on pharmacies, and a reduction in reimbursement to provide the prescription. In some states, these uncollected copays could cost the average pharmacy thousands of dollars each year.

These copay losses are obviously higher for pharmacies in areas that serve a significant number of Medicaid recipients. We believe that the Medicaid program should compensate pharmacies for the value of these lost copays.

Medicaid Federal Upper Limits (FULs) for Generic Pharmaceuticals

Community retail pharmacy was significantly frustrated with HCFA this past year as the agency attempted to develop a credible, reliable, valid Federal Upper Limit (FUL) list for generic drugs. This list represents the maximum amount of Federal matching funds that states will receive for a marketbasket of generic drugs that meet certain Federal criteria.

Not all generics have an FUL, but the accuracy and integrity of this list is important because almost all private third party prescription payors use this list to set their maximum reimbursement amounts for generics. Moreover, more than half the states use these Federal FULs to set their own "maximum allowable costs" for generic drugs in their own Medicaid programs. Thus, the impact of the list extends well beyond Medicaid. If the list is not accurate, and does not reflect current market realities, it will discourage utilization of lower-cost generics in favor or higher-priced brand name drugs.

HCFA is supposed to publish an updated and current FUL list every six months. However, the first major substantial overhaul to the list in almost two years was published by the agency in April 2000. The two-year lag between updates was a serious problem. That is because there were substantial price increases on many generic drugs during this time, which were not reflected on the outdated FUL list, and significant changes in the number of manufacturers in the generic marketplace.

Unfortunately, the April list contained hundreds of inaccuracies, and several more iterations were needed over a period of eight months before the agency published a final list in December that appears to be reasonably accurate. Many of the FULs on the original April list were determined with the prices of products that had been discontinued for many years.

We believe that many of these problems could have been avoided had the agency been more diligent in collecting the appropriate data and assessing the realities of the generic drug marketplace.

Nevertheless, we believe that the agency did work in good faith with Medicaid directors, pharmacy providers, and other affected parties, in identifying and correcting errors with the list. We appreciate that the agency delayed implementation of the list until such a time that most of the problems were corrected.

Assuring the accuracy of this list is critical. In addition to providing the pricing "reference source" that HCFA used to set the FUL, we believe that HCFA should also be required to release the corresponding National Drug Code (NDC) numbers used to establish the FUL. In our opinion, this is the only way that the accuracy and the integrity of the list can be validated. Without this information, there is absolutely no way for providers to know if HCFA is using reliable, valid information to set its FULs.

Medicaid State Plan Amendment Approvals

The federal government gives billions of dollars to state Medicaid programs, and federal law requires HCFA to review state Medicaid plans to ensure that state Medicaid programs are spending that money in accordance with federal law. Unfortunately, HCFA has repeatedly refused to conduct thorough reviews of amendments to state Medicaid plans to make sure that they comply with federal law.

HCFA simply accepts assurances from a state Medicaid agency without investigating whether those assurances are accurate. The result is that HCFA approves clearly illegal state plan amendments. For example, last year a federal court ruled a HCFA -approved state plan amendment discriminating against chain pharmacies to be in violation of the US Constitution, federal statutes, and HCFA's own regulations.

Moreover, Federal law requires Medicaid payment rates to be consistent with efficiency, economy, and quality of care. States cannot arbitrarily reduce Medicaid pharmacy reimbursement to balance their Medicaid prescription drug budgets. States have to comply with several Federal standards when setting Medicaid pharmacy reimbursement. For example, Federal Medicaid law establishes standards for payment rates to providers in state Medicaid programs. See 42 U.S.C. § 1396a(a)(30)(A).

Payments have to be "consistent with efficiency, economy, and quality of care…and sufficient to enlist enough providers so that care and services are available under the plan at least to the extent that…they are available to the general public…". In addition, a 1994 memo from HCFA to state Medicaid directors requiring states to justify whether payment rates to pharmacies are "reasonable" and in compliance with Federal law, said:

States wishing to modify their EAC (Estimated Acquisition Cost) levels may, among other methods of verification, audit an appropriate number of pharmacies to determine current acquisition costs before making modifications to the EAC levels.... we still expect that States will continue their present activities to establish a reasonable dispensing fee level and will document them in their State Plan. Such activities could include: (1) audits and surveys of operational costs; (2) compilation of data regarding professional salaries and fees; and (3) analysis of compiled data regarding pharmacy overhead costs, profits, etc... The methods or standards they utilize to establish such fees are at the discretion of the individual State but should be documented in support of the State plan.

Yet, we have seen case after case where HCFA simply approves pharmacy payment reductions proposed by the states for budgetary reasons, or the agency fails to adequately assess the evidence presented by the state to justify the reimbursement change. Many of the studies that are submitted to HCFA are deeply flawed, yet the agency relies on these studies to approve state plan amendment changes.

Adding insult to injury is the fact that these pharmacy reimbursement reductions do little to control escalating Medicaid prescription drug program expenditures. Expenditures for prescription drugs in the U.S. Medicaid program increased from $8 billion to about $13.5 billion, or about 69 percent in the last five years (1993-1998). Reasons include:

• More Prescription Use per Medicaid Recipient: The number of prescriptions used by each Medicaid recipient increased by 23 percent from 1993 through 1998.

• Medicaid Recipients Using Higher-Priced Prescription Drugs: The average Medicaid prescription price increased 70 percent between 1993 and 1998. However, of this amount, there was an 85 percent increase in the pharmacist's cost of purchasing the drug from the manufacturer. In real dollar terms, the amount that the state pays the pharmacist to dispense the prescription increased by only 0.6 percent - which did not even keep pace with the rate of inflation, which was about 13 percent.

None of these factors can be addressed by reducing pharmacy reimbursement. Yet, HCFA continues to approve these SPAs, knowing full well that experience has shown that pharmacy reimbursement reductions have negligible impact on reducing Medicaid prescription drug spending. The process by which HCFA assess and approves SPAs must change.

Inappropriate Use of Medicaid as Leverage for Pharmacy Price Controls

We are also seriously concerned that states are using pharmacy's Medicaid participation as leverage to extend retail prescription pricing discounts to populations that are not Medicaid eligible. For example, some states, such as California, have added a new material requirement to a pharmacy's participation in the state's Medicaid program. That is, pharmacies are required to charge all Medicare beneficiaries no more than the Medicaid prescription rate, regardless of the beneficiary's income, if they want to participate in Medicaid.

We understand the states' interest in reducing the cost of prescription drugs to seniors. However, we strongly object to arbitrary controls on our prices, especially since these programs do nothing to reduce our cost of buying the drug, which is the overwhelming major cost factor in any prescription. Thus, pharmacies must absorb the entire cost of this discount.

Furthermore, NACDS opposes state efforts to tie participation in these price control discount programs to the Medicaid program. No pharmacy that agreed to participate in the Medicaid program did so with the expectation that it would be required to offer a discounted retail price to populations that were not originally covered by Medicaid.

We also question whether a pharmacy's willingness to provide discounts to senior citizens is germane to its overall fitness to participate in the state's Medicaid program. NACDS recognizes that states have an interest to ensure pharmacy providers are legitimate businesses, are unlikely to engage in fraud, and employ pharmacists and other personnel who are qualified to safely dispense medications and counsel Medicaid recipients. However, requiring pharmacies to provide prescription drugs at discounts to senior citizens, which may jeopardize their long-term viability, does not seem to be reasonable criteria for participation in state Medicaid programs.

HCFA apparently is unaware that states are tying pharmacy participation in Medicaid to participation in non-Medicaid programs. We find it difficult to believe that HCFA is not aware of how states are using the Medicaid program in ways that are unconventional or inappropriate. We believe that the agency should unequivocally tell states that participation in the Medicaid program should not be used as leverage to force pharmacies to participate in programs that do not serve Medicaid populations. If states want to increase access to prescription drugs for seniors, they should establish meaningful prescription drug coverage programs, not retail pharmacy price controls.

Medicaid Prescription Drug Waiver Programs

We are concerned about certain Federal Medicaid waivers that have been approved that extend Medicaid prescription pricing - including drug manufacturers' rebates - to certain low-income populations. Once again, we understand the states' interest in providing reduced priced prescription drugs to low income seniors. We continue to support prescription drug coverage programs as the best method to achieve this goal.

However, these programs simply require the pharmacy to discount the retail prescription price by the cumulative Medicaid manufacturer rebate amount and the Medicaid pharmacy reimbursement discount amount. Pharmacies are then compensated for the retail price reduction amount equal to the manufacturers' rebate by the state, who collects these rebates from the manufacturers.

We do not believe that pharmacies should be required to participate in these programs as a condition of Medicaid participation. We are also concerned about requiring pharmacies to pass along the additional manufacturers' discount at the retail pharmacy counter, without some assurance from the state that they will be able to collect all the rebates from the manufacturer, and provide them to the pharmacies in a timely and consistent manner to compensate for this price reduction.

Medicare Diabetes Education and Training Program

The 1997 Balanced Budget Act (BBA) created a new diabetes education and training benefit for ambulatory Medicare beneficiaries. The intent of the new benefit was to allow ambulatory Medicare beneficiaries with adult-onset (Type II) diabetes to receive important education and training from health professionals, on such aspects as diet, exercise, glucose monitoring and drug therapy - to help them better manage their condition.

These preventive health care services have been proven to improve quality of life and reduce health care costs. Many community pharmacies provide diabetes self-management benefits. These pharmacy-based programs work. NACDS members provided HCFA extensive evidence during the regulation's comment period with significant evidence of patient satisfaction with these programs. Private payors are increasingly recognizing pharmacy's role in diabetes management programs, and studies have demonstrated the value of these programs.

The BBA allowed pharmacy providers to participate as providers in this program by virtue of the fact that pharmacies already provide diabetic supplies and products to Medicare beneficiaries. Unfortunately, the final rule that HCFA promulgated in December 2000 -- over three years after the enactment of BBA -- did not recognize the value of pharmacy-based diabetes self-management services. The rule established restrictive, onerous, and unnecessary standards for provider participation. The result is that community pharmacies will most likely be unable to provide diabetes self-management benefits to Medicare beneficiaries. The many senior citizens with diabetes who could have been helped by visiting their conveniently-located community pharmacy will now have to find an outpatient hospital or a clinic that can comply with the HCFA regulations.

Many community pharmacies that currently do not provide such benefits viewed the BBA reforms as an opportunity to expand the services they provide may not initiate diabetes self-management programs. There is no logical reason why the most accessible health care professionals - pharmacists - and the provider from which diabetics purchase most of their supplies should be logistically excluded from participating in this program. It is a disservice to Medicare beneficiaries and community pharmacies.

Medicare Supplier Issues

Community pharmacies are suppliers of Medicare Part B covered durable medical equipment (DME) and select prescription drugs. NACDS members' frustration with HCFA's inability to administer these benefits knows no bounds. The Agency has been unwilling to adopt computerized on-line systems that almost every other health care payor has used for years.

These on-line claims adjudication systems save health care payors money by assuring eligibility and coverage; preventing fraud, abuse, and over-utilization; and improving customer service by allowing the pharmacy to more efficiently process their claims. Yet HCFA refuses to even consider the value of an on-line claims adjudication system.

HCFA currently contracts with four durable medical equipment regional carriers (DMERCs) to process Medicare Part B claims. The customer service that the DMERCs provide leaves much to be desired. "Provider relations" staff members are often difficult to reach, may not return phone calls, and deliver inconsistent directions to community pharmacies. Moreover, the DMERCs do not communicate changes to the program in a prompt and effective manner.

The recent requirement that Medicare Part B suppliers accept assignment for all covered prescription drugs is a case in point. The requirement went into effect on February 1, 2001. Yet, the DMERCs did not directly communicate this change to our members. In fact, when several chain pharmacies called DMERC staff after February 1, many did not know of this change in policy. In addition, because Medicare does not operate an "on line" claims system, it is impossible for the pharmacy provider to know if the beneficiary has reached their $100 annual Part B deductible, or the "Medicare allowable" amount for a particular product being provided. It is extremely difficult for pharmacies to comply with changes in Medicare policy when DMERC staff are so poorly informed, and when the technology is such that simple, basic information cannot be provided to pharmacies to help them better serve Medicare beneficiaries.

If the DMERCs operated in the private marketplace, these failures would not be tolerated. HCFA would have replaced the insurance companies that perform the DMERC function years ago. Yet, despite the concerns NACDS and other provider groups have expressed to HCFA, the problems with the DMERCs persist. HCFA needs to be reformed to be more responsive to provider-related concerns.

Conclusion

NACDS supports Congressional action to evaluate HCFA policies and programs, and how the agency's administration of these programs impacts beneficiary access to quality health care and the ability of providers to effectively and efficiently participate in the programs.

HCFA often times appears to make decisions contrary to its own rules and regulations. Moreover, it often fails to understand, or simply ignores, the impact of its decisions on the health care marketplace. Or, more critically, it just doesn't understand the marketplace. We recognize that HCFA may be overworked and understaffed. Congress and the Administration will have to decide how best to structure the agency for the 21^st century, and the role that HCFA might have in administering any new prescription drug benefit for seniors. We look forward to working with you in addressing these issues in this Congress to make HCFA more responsive to the patients and providers that it serves. Thank you.