HEALTH CENTER REIMBURSEMENT FOR PRESCRIPTION DRUGS: MEDICAID PPS AND SECTION 340B DRUG PRICING CONSIDERATIONS

Transcription

1 THE NATIONAL ASSOCIATION OF COMMUNITY HEALTH CENTERS, INC. ISSUE BRIEF # 20 Systems Development Series HEALTH CENTER REIMBURSEMENT FOR PRESCRIPTION DRUGS: MEDICAID PPS AND SECTION 340B DRUG PRICING CONSIDERATIONS Prepared by: Roger Schwartz, Esq. Feldesman, Tucker, Leifer, Fidell & Bank, LLP December, 2001 For more information contact: Freda Mitchem, National Association of Community Health Centers 1330 New Hampshire Avenue, N.W., Suite 122, Washington, D.C / Fax 202/ Fmitchem@NACHC.com Supported by a Cooperative Agreement with the U.S. Department of Health and Human Services, Public Health Service, Health Resources and Services Administration, Bureau of Primary Health Care

2 Health Center Reimbursement For Prescription Drugs: Medicaid PPS and Section 340B Drug Pricing Considerations I. Introduction Many State Primary Care Associations (PCAs) and individual health centers are involved in on-going discussions with their State Medicaid agencies regarding implementation of a Prospective Payment System ( PPS ) for Federally qualified health centers ( FQHC ). One of the issues that PCAs and centers may want to raise with the State in these discussions concerns reimbursement for prescription drugs. Before doing so, consideration must be given to the State s current payment arrangement to health centers and the interplay with the center s Section 340B participation. II. Medicaid and Section 340B Prior to PPS Federal Medicaid law, prior to the recent passage of PPS legislation, required that FQHCs be reimbursed by State Medicaid agencies on the basis of reasonable cost. 1 Most States (and, arguably the Federal Medicaid statute) view reasonable cost to require States to reimburse FQHCs on the basis of Medicare reasonable cost methodology (found at 42 C.F.R (Medicare FQHC regulations) and 42 C.F.R. 413 (Medicare reasonable cost regulations)). The Medicaid statute defines services of an FQHC to include the so-called Rural Health Clinic ( RHC ) core services found in Medicare law and any other ambulatory service included in the State s Medicaid plan. 42 U.S.C. 1396d(a)(2)(C). Prescription drugs are listed in the Medicaid statute as an optional service that a State can choose to 1 Under federal legislation passed in 1997 and 1999, States were allowed to phase-out FQHC reimbursement; hence, some States were reimbursing health centers based on 95% of reasonable costs in FY Also, a number of States reimbursed FQHCs substantially less than reasonable costs due to their receipt of a Section 1115 waiver from HHS.

3 provide in its State Medicaid plan. 42 U.S.C. 1396d(a)(12). Consequently, if a State opts to include prescription drugs in its State plan (and all states do), then prescription drugs would be viewed as an FQHC ambulatory service for which the center is entitled to be reimbursed on the basis of reasonable costs (prior to PPS implementation). Under Section 340B of the Public Health Service Act ( 42 U.S.C. 256b), drug manufacturers must enter into agreements with HHS to provide covered outpatient drugs to covered entities at discounted prices. In that statute, FQHCs are included in the list of entities eligible to purchase covered drugs at discounted prices. Section 340B policy provides, however, that in billing Medicaid for drugs, a Section 340B entity can bill no more than its actual acquisition cost plus a reasonable dispensing fee established by the State Medicaid Agency. There does not appear to be uniformity among the States in the manner in which they reimburse health centers for prescription drugs. Some States allow centers to include their actual cost for drugs (whether purchased under 340B or otherwise) as well as the costs of dispensing the drugs (including center overhead, employee costs, etc.) into the center s cost report, and reimburse them on the basis of reasonable cost. In other words, costs related to the purchase and dispensing of drugs are allowable costs in the reasonable cost methodology. Many states, however, reimburse health centers on a fee-for-service ( FFS ) basis for drugs, that is, they pay the health centers a flat fee to cover the cost of the drug and a set dispensing fee. Generally, these FFS payments tend to be less than the health center would receive under reasonable cost. The portion of the FFS payment for the drug acquisition may actually be more than the center s cost for the drug, (unless the center participates in Section 340B), but the dispensing portion of the FFS payment is usually substantially less than the center s cost.

4 In States which reimburse FQHCs for drugs on the basis of FFS, a health center may choose not to participate in Section 340B since it can only be paid its acquisition cost, which may be less than the State FFS payment for the drug. The center may prefer to bargain for the lowest price it can get from a manufacturer and then be reimbursed a higher amount under the State s FFS payment. However, in these arrangements, the State s dispensing fee to the center is usually well below the center s dispensing cost, so the center can still end up losing money in these arrangements. Also, if a health center is essentially carving out its Medicaid drug purchases by not buying them under Section 340B, the center is required to inform the BPHC Office of Pharmacy Affairs of this arrangement and provide them with the Medicaid number under which the center bills for drugs, so that the State Medicaid Agency can take steps to recover a rebate from the manufacturers for those drug purchases. See HRSA Notice at 65 Fed. Reg (March 15, 2000). III. Legal Impact of PPS on FQHC Drug Reimbursement The newly-legislated Medicaid FQHC Prospective Payment System ( PPS ) provides that State agencies must reimburse FQHCs in FY 2001 based on a per visit rate that reflects the average per visit cost of the FQHC for FY 1999 and U.S.C. 1396a(aa)(2). State agencies must use the same (Medicare) reasonable cost methodology provided in the statute prior to PPS to determine an FQHC s per visit cost in FY 1999 and FY 2000, find the average per visit rate for those two years and apply it as the center s per visit rate in FY 2001 (which can then be altered by the cost of any service added or dropped by the center in FY 2001). The FQHC is locked into this FY 2001 per visit rate in subsequent years except for increases based on the Medicare Economic Index ( MEI ) and the cost of any new services added (or services dropped)

5 by the center in subsequent years. 42 U.S.C. 1396a(aa)(3). A State, however, can implement a FQHC reimbursement system different than PPS, but only if the affected FQHC (1) agrees to the alternate payment methodology ( APM ), and (2) it results in payment to the FQHC that is no less than the amount the center would have received under PPS. 42 U.S.C. 1396a(aa)(6). Because the PPS legislation did not amend the definition of FQHC services, prescription drugs remain an FQHC service, the cost of which would be included in the FQHC s PPS per visit cost. If a health center was reimbursed for these services on the basis of reasonable cost in FY 1999 and FY 2000, or if it added drugs as a new service in FY 2001, the reasonable cost of these services should be included in the FQHC s per visit cost for FY CMS recent guidance to State Medicaid Agencies states that the Medicaid PPS rate must include all Medicaid covered services, including ambulatory services, which CMS describes as outpatient services provided in an FQHC and included in the state plan. BIPA of 2000, Section 702, PPS for FQHCs and RHCs, Q s and A s, Q & A No. 8, issued by CMS in September, Thus, regardless whether a FQHC was reimbursed in the past for drugs based on reasonable cost or FFS, and regardless whether it participated in Section 340B, it could have its actual drug costs for FY 1999 and FY 2000 factored into its PPS per visit rate for FY Even under PPS, however, some States appear to be carving prescription drugs out of reasonable cost/pps calculations, and will pay for the service FFS. This prescription carve out may be the better option for many FQHCs. IV. Possible Adverse Effects On Prescription

6 Drug Reimbursement Under PPS At first glance, PPS would appear to be beneficial for drug reimbursement to health centers since reasonable cost reimbursement should include a health center s actual acquisition and dispensing costs. However, drug payment under PPS could ultimately be a major financial problem for health centers. While drugs are an allowable cost under Medicare/Medicaid reasonable cost methodology, they normally are not treated as billable visits because there is not a face-to-face encounter with a practitioner. Consequently, if a health center s PPS rate is established for FY 2001 factoring in drug costs, and the center s drug costs increase in the subsequent years (which they unquestionably will), the FQHC may not be able to receive additional payment to cover these additional costs. Consider, for example, the following hypothetical: 1. An FQHC s allowable cost in FY 1999 and FY 2000 averages out to $1,000,000, of which $200,000 was spent on prescription drugs. The center s billable visits for those same two years averages 10,000, of which 5,000 were Medicaid recipients. The center s PPS/per visit rate for FY 2001, therefore, is $1,000,000 10,000 visits = $100 per visit. The center receives $100 X 5,000 visits = $500,000 from Medicaid. 2. In FY 2002, the FQHC does not add on new services, however, an increase in drug acquisition and dispensing costs raises the center s prescription drug costs to $300, while its other allowable costs and visits remain the same as in FY 1999/2000. Assume also that the Medicare Economic Index ( MEI ) in FY 2002 increases by 3%.

7 3. The center s per visit rate in FY 2002 would be calculated as follows: $ % (MEI) = $103 per visit. The center s per visit cost in FY 2002, however, would be $1,100,000 10,000 2 = $111. In effect, the health center receives $8.00 less per visit than its per visit cost, which results in a $35,000 loss over FY 2001 s payments: $111 per visit cost x 5,000 Medicaid visits (no change in billable visits since drugs are not a billable service) = $550,000 in Medicaid; $103 per visit payment x 5,000 = $515,000 in Medicaid reimbursement; $550,000 - $515,000 = $35,000. There is, therefore, a tension between Section 340B participation and Medicaid FQHC legislation, which did not exist prior to PPS enactment. Prior to PPS, a health center s obligation under Section 340B to bill Medicaid no more than its acquisition cost for drugs (plus dispensing costs) was consistent with Medicaid reasonable cost reimbursement, i.e., the health center reports its acquisition cost as its actual allowable cost for purchasing drugs and adds in costs related to dispensing these drugs; consequently, its reasonable cost should be close to its total actual cost (unless the State has a per visit payment limit that the center has exceeded). Under PPS, however, the health center s acquisition and dispensing cost for drugs in a year subsequent to 2001 may have little relation to its PPS reimbursement for drugs since PPS is a set per visit rate plus MEI (plus the cost of any new service). 3 Thus, if the cost of drug acquisition and/or dispensing increases over the years, in excess of the MEI, the health center would be paid below its cost. As shown in the example above, the health center loses even more if the drug costs go up due to an increase in center patients since an 2 Again, drugs are an allowable cost, but not a billable visit, so an increase in drug costs results in an increase in center costs, but not in center visits. However, in some States, the costs (and reimbursement) for drugs are reported in a separate cost center of the cost report. This approach is discussed in some detail in the Section IV of this Issue Brief, Solutions to Adverse Financial Impact of PPS. 3 This, of course, will also be true for health centers that do not participate in Section 340B.

8 increase in the number of patients receiving drugs does not necessarily result in a comparable increase in billable visits. Solutions to the Adverse Financial Impact of PPS There appears to be a number of approaches that the State and PCA/FQHCs could agree upon to avoid or minimize the adverse impact on drug costs inherent in PPS: 1. The State could include as a change in scope of service any substantial increase in the cost of drugs due to market charges, due to a change in the population served by the center, or due to any increase in the service cost as a result of expansion of the service by the center (an increase in patient volume). For example, if the center s HIV/AIDS population expands over a period of time, or if a new expensive drug for the treatment of HIV/AID patients comes on the market, or if a health center opens up three new sites, thereby expanding substantially the number of center patients receiving drugs -- the State could adjust the center s drug reimbursement accordingly. 2. The State could carve out drug costs from FQHC reimbursement (as many States did prior to PPS implementation) and pay for them fee-for-service -- which for Section 340B clinics, means acquisition cost plus the State s dispensing fee, and for non-340b clinics, would be the State s FFS drug payment and dispensing fee. Since CMS has stated that FQHC ambulatory services are to be part of the PPS payment methodology, this approach may require the State submitting this carve out as part of an alternative payment methodology agreed upon by the

9 State and affected FQHCs. However, it is possible that some states will simply carve out drugs as part of its PPS program. 3. A State could agree (a) to pay a 340B center its actual acquisition costs for drugs, thus reimbursing the center its actual cost and allowing a State to benefit from the center s ability to purchase drugs at low costs, and (b) to reimburse the health center its reasonable cost for dispensing drugs. This approach would allow the center to calculate in the various costs related to the center s disposition of drugs (overhead, pharmacist s time, costs, etc.). In short, under this approach, the center essentially receives cost-based reimbursement for the purchase and dispensation of drugs. As with paragraph 2 above, this kind of arrangement might require an agreement by both the State and affected FQHCs in order to meet the mutual agreement requirements of a State s instituting an alternative payment methodology. 42 U.S.C. 1396a(aa)(6). 4. Some States currently (prior to PPS) pay for certain Medicaid FQHC services, such as dental, transportation, or pharmacy, in a separate cost center. In these States, a health center s total pharmacy costs are calculated separately, allowing for overhead, administrative cost, cost of drugs (which could be Section 340B purchases), pharmacist costs, etc.. These overall drug costs are divided by the number of script (prescriptions) issued by the center, thereby coming up with a per script rate, much like a per visit rate. A health center that has used this approach in the past, including in FY 1999 and FY 2000, could easily calculate a PPS per visit rate minus pharmacy and a PPS per script rate for pharmacy cost for FY 2001, and continue to use both rates in subsequent years. This approach would not guarantee FQHCs full reimbursement for their actual prescription costs

10 because prescription costs are likely to increase annually in excess of the MEI, but it would solve the billable visit vs. allowable cost problem. FQHCs that have not used this approach in the past could discuss this option with their States. Having a separate cost center for prescriptions could still fit into the context of a PPS system, so the PCAs and FQHCs would not be asking the State to adapt an alternative payment methodology (APM) (nor to revise their SPA to reflect a APM). In addition, this approach would allow centers to ease up on advocating broader change of scope of service definitions under PPS. For health centers, this approach allows for a much more equitable solution to reimbursement for a service the cost of which is bound to increase substantially in the near and long term. 5. Another approach might be for the health center not to participate in Section 340B and for the State to pay the center the average wholesale price (AWP) for a drug minus a sufficient percentage to provide the State a discount comparable to (1) the normal fee that retail manufacturers must deduct from its AWP plus (2) the rebate the State would receive from a manufacturer under the Medicaid drug rebate legislation. 42 U.S.C. 1396r-8. Under this arrangement, the health center may still realize enough difference in this payment rate from the State to fare better in capturing its dispensing costs. Finally, in any arrangement agreed upon by the State and the centers as part of a straight PPS methodology, it is important that health centers insure that their drug reimbursement is not inadvertently lowered because of the PPS FY

11 2002 process. For example, if the State begins including drugs in the PPS per visit basis in FY 2001, but had paid FFS for these services in the past -- how will it treat those services in FY 1999 and FY 2000? Will it recalculate FY 1999 and FY 2000 with drugs added into cost, but only for purposes of the 2001 PPS per visit rate (i.e., continues to pay for FY 1999 and 2000 on a FFS basis)? Or will the State reimburse FQHCs for drugs in FY 1999 and/or FY 2000 based on reasonable costs since it is using reasonable cost averages for FY 1999 and FY 2000 for FY 2001? Or will the State treat drugs as a new service in FY 2001 and calculate drug costs into its FY 2001 PPS rates based on FY 2001 costs (rather than FY 1999/FY 2000 average)? Summary PCAs and FQHCs should raise drug costs as a specific issue to be negotiated under PPS. In doing so, they should consider the interplay between Section 340B and PPS. A health center participating in Section 340B would likely have incurred lower drug purchase costs for FY 1999 and FY 2000 than a comparable non-340b health center, and, therefore, its over-all PPS per visit rate may be less than a comparable non- 340B center. The 340B center may find itself locked into a lower per visit payment rate unless a State will consider the increased cost of a service (such as drugs) as a basis for revising a PPS per visit rate. This also will be an important issue for non-340b centers as drug prices escalate (most likely, well above the MEI). PCAs and FQHCs should consider, therefore, the suggested alternatives in Part IV of this Issue Brief. A fee-forservice payment, for example, may be the better approach for many health centers. A better alternative might be treating drugs as a separate cost center and receipt of

12 reimbursement on a per script basis. Variations of these approaches may be more acceptable to a State Medicaid agency. In short, as a basic premise, inclusion of prescription drug costs under a straight-forward PPS per visit rate may harm centers in the long term -- alternative approaches should be reviewed by centers and may have to be a key advocacy issue in discussions with State Medicaid agencies.

13 Ras\nachc\reimbursement-PPS-340B