Summary of Report 03-022

March 2003

Report Number 03-022

The Health and Human Services Commission (Commission) overestimated the revenue from the Children's Health Insurance Program (CHIP) drug rebate program it initiated, and it may not achieve the cost savings it anticipated from assuming responsibility for purchasing CHIP drugs. Specifically:

• Instead of implementing the $14 million supplemental Medicaid drug rebate program that was specified as one of several Medicaid cost containment measures in the General Appropriations Act (77th Legislature), the Commission implemented a CHIP drug rebate program. In fiscal year 2002, the State's share of CHIP drug rebate collected revenue totaled $30,016. As of December 19, 2002, the State's share of fiscal year 2003 collected revenue from the CHIP drug rebate totaled $148,414.
  
  According to Commission documentation, the Pharmaceutical Research and Manufacturers of America (PhRMA) proposed the CHIP drug rebate program. The supplemental Medicaid drug rebate was intended to be a new rebate in addition to the existing Medicaid drug rebate the Commission presently collects. The Commission considered the $14 million supplemental Medicaid drug rebate to be an optional cost containment measure.
  
  As a result of erroneous assumptions and inadequate analysis, the Commission's projections for CHIP drug rebate revenue decreased from $9.6 million to $4.5 million for the 2002-2003 biennium. These projections were significantly lower than the $14 million target for the supplemental Medicaid drug rebate specified in the General Appropriations Act.
  
  
• Early data produced since the Commission took over the management of the CHIP drug benefit indicates that the anticipated cost savings (excluding any CHIP drug rebate revenue) from this change may not be realized. In May 2002, the Commission specified that the State's portion of the projected cost savings from assuming the CHIP drug benefit would be $7.9 million for the 2002-2003 biennium. However, as more actual cost data became available, the Commission updated its projections of estimated state cost savings to as low as $4.3 million for that biennium. Taking into account all administrative expenses, the total net cost savings in fiscal year 2002 was approximately $5.3 million in both federal and state funds. The State's share of the $5.3 million in cost savings was $1.5 million. Whether any actual cost savings will be achieved for the 2002-2003 biennium depends on drug utilization and the cost per member per month throughout the remainder of fiscal year 2003.

We also reviewed the Commission's development of CHIP health maintenance organization (HMO) premiums. The Commission used relevant data and made reasonable assumptions when it developed the initial CHIP HMO premiums. The Commission established second-year CHIP HMO premiums based on a comprehensive analysis. Overall, the HMOs requested a 50.7 percent increase (calculated on a weighted average basis) in premiums for the second year of CHIP. Based on its analysis and negotiations with HMOs, the Commission gave the CHIP HMOs a 13.9 percent increase (calculated on a weighted average basis). However, the Commission did not independently verify the HMO-provided data that it used to establish HMO premiums for the second year of CHIP.

• The Commission had to reduce its CHIP drug rebate revenue estimates due to deficiencies in planning and analysis.
  
  
• The Commission's methodology for removing the drug benefit from CHIP HMO premiums was reasonable, but the anticipated cost savings from managing the drug benefit in-house may not be realized.
  
  

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