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Archives | (July 2003)
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The Prescription Drug Benefit: Boon or Boondoggle? (cont.)
------------------------------------------------------------------ Page 3 of 6 You would think that with its enormous buying power, the federal government could negotiate substantial discounts on the prices they pay for drugs. Other institutions with significant buying power such as health maintenance organizations, retailers like K-Mart and major drugstore chains routinely engage in such negotiations to reduce their costs and improve profitability. Federal reimbursements would be hundreds or even thousands of times larger that the purchases made by the largest HMO, retailer or drugstore chain, so you would think its leverage would be that much greater. That assumes, though that the institution was willing to use its market clout. Apparently, the federal government isn’t! Anyone who has dealt with the federal government in a commercial transaction can tell you how convoluted the government’s purchasing rules can be. Although the rules and stringent specifications that normally accompany a federal contract are intended to protect the public, they can also be manipulated by the unscrupulous to gain an unfair profit or advantage. This is exactly what is happening in the case of prescription drugs, and what may cause the cost of any drug benefit to spiral out of control. The way it works is this. Commercial firms are supposed to give the federal government the best price they offer to any of their customers. Defining just what this is can be difficult. In the case of prescription drugs, this is accomplished through something called the “Average Wholesale Price” or AWP. It is supposed to reflect the average price at which the company sells its drugs to its customers. That’s fair isn’t it? Well, not really. You see since the AWP includes all sales, it does not accurately reflect the discounts that are given to large purchasers. The simple fact is that K-Mart or Costco do not pay the same wholesale price that a single, independently owned drugstore in a small town would. But the wholesale price to such small retailers is included in the calculation used to establish the AWP. As a result the AWP ends up significantly above the LOWEST price the drugs are sold for. The abuse of AWP pricing has become so severe that in 2002 the States of Nevada and Montana sued 18 drug manufacturers to obtain a refund on charges for drugs paid for by Medicaid. In the press release issued at the time the lawsuit was filed, Montana Attorney General Mike McGrath said: “Montana taxpayers are being cheated out of millions of dollars … and it is especially troubling that Medicaid and Medicare consumers – often senior citizens – are the hardest hit by this deception.” |
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