Summary

In 1990, in an effort to control Medicaid's increasing outlays for prescription drugs, Congress significantly changed the way that Medicaid pays for outpatient drugs. Medicaid had been paying near retail prices for outpatient drugs, while other purchasers, such as hospitals and health maintenance organizations (HMO), were able to negotiate big discounts with drug manufacturers. The new legislation required drug manufacturers to give state Medicaid programs rebates for outpatient drugs on the basis of the lowest prices available to any purchaser. In a September 1991 report (GAO/HRD-91-139), GAO discussed changes in prescription drug prices charged the Department of Veterans Affairs and the Defense Department. This report focuses on changes in drug prices charged hospitals and HMOs. GAO found that drug price changes experienced by HMOs and hospitals varied considerably since the enactment of the Medicare rebate provisions. Some prices increased substantially, while others declined. Price increases tended to be more common and more significant for outpatient drugs than for inpatient drugs, but few other clear patterns emerged. GAO could not determine the extent to which the price hikes were due to the new law.

GAO found that: (1) prices for HMO outpatient drugs increased significantly the year after passage of the rebate provision, while GPO inpatient drug prices dropped slightly and GPO outpatient drug prices rose slightly; (2) the range of price changes varied widely before and after passage of the rebate provision; (3) the effect of price changes on HMO and GPO drug costs depended on the drugs' original costs and utilization; (4) HMO tended to have greater overall drug expenditure increases because they did not have inpatient drug costs to offset outpatient expenditures, and most of their drugs were not available in a generic form; (5) the average percentage discount both groups received rose slightly the year after the rebate provisions took effect, although the variance was wide; and (6) many manufacturers changed the duration of their contracts from 1 to 5 years to 1 year or less, and no longer offered fixed prices for the duration of the contract.