In the Deficit Reduction Act (DRA), Congress made major, controversial, and technically complex changes to Medicaid prescription drug pricing and pharmacy reimbursement. The policy changes, which are expected to save the feds and states $8.4 billion over the next five years, present significant challenges to both drug manufacturers and retail pharmacies.

To implement the DRA changes, the Center for Medicare and Medicaid Services (CMS) issued final rules that, most notably: (a) revise the definition of average manufacturer price (AMP), (b) create a new formula for calculating Federal Upper Limits (FULs) on multisource drugs, (c) require rebates for certain physician-administered drugs, and (d) clarify rebate liability for authorized generic drugs.

Significant Implications:

For pharmacies, the DRA changes represent significant cuts to Medicaid reimbursement – unless states act to mitigate the changes or increase dispensing fees to compensate for lower product reimbursement. While CMS tried to mitigate the impact on pharmacies, studies by GAO, OIG, and pharmacy trade groups suggest that pharmacies could easily lose money with many drugs dispensed under Medicaid, with the biggest loss in generic drugs.

The changes also hold major implications for pharmaceutical companies. The new policies create new financial, operational, and compliance challenges. They will require most drug makers to rethink pricing strategies and access the impact across all their classes of trade. Average Manufacturer Price (AMP), a calculation that has been a closely held secret under the law since 1991, will become transparent through monthly public reporting of AMP-based prices of every drug on sale in the U.S. You may expect this to have some interesting effects on marketplace behavior and payor negotiations. And, of course, the changes will increase rebate payments to states.

States will benefit from the resulting cost savings. However, state Medicaid directors face strong pressure from community and chain pharmacies to compensate for lost revenue. States also have concerns about the reliability of CMS and pharma industry data, especially in the first couple years given the big change in methodology, scope, and frequency of data reporting. States must also make a variety of systems changes under short notice.

Across the health care system, the DRA changes are further evidence of the increasing power of government policy on the pharmaceutical supply chain. Now that taxpayer-funded health programs pay for the majority of drugs, changes in Medicaid or Medicare drug policy are no longer limited to affected program. Federal changes ripple throughout the industry, forcing changes in commercial practices and business strategy.

Finally, the new rules put a few more nails in the coffin of Average Wholesale Price (AWP) or published prices.

Average%20Manufacturer%20Price.jpgAverage Manufacturer Price:

In concept, Average Manufacturer Price (AMP) is the average unit price paid to the manufacturer for the drug in the U.S. by wholesalers for drugs distributed to the retail pharmacy class of trade. (Try to repeat that ten times fast.) However, how this plays out has been highly controversial, leading to inconsistencies across manufacturers, numerous highly critical studies by the HHS Office of the Inspector General (OIG) and Government Accountability Office (GAO), allegations of gaming, and countless law suits against drug makers by U.S. attorneys and state attorneys general.

Following the statutory changes made by the DRA, CMS’ final rule makes several fundamental changes to AMP. Most notably, the final rule:

  • Excludes customary prompt pay discounts to wholesalers from the calculation of AMP.
  • Clarifies definition of retail class of trade and wholesaler and how to treat sales reimbursed by third party payors.
  • Defines what prices should be included in or excluded from the determination of a drug’s AMP.
  • Excludes sales to nursing homes and discounts, rebates, or prices to PBMs (except when PBMs act as mail order pharmacies – an exception very controversial with retail pharmacies).
  • Defines many key terms for purposes of the Medicaid drug rebate program. Newly defined terms include retail pharmacy class of trade, customary prompt pay discounts, administrative and service fees, returned goods, average unit price, bona fide service fee, bundled sales, net sales, and manufacturer coupons.
  • Clarifies how manufacturers should account for price reductions and other pricing arrangements in calculating AMP.

Prior to the DRA, sales by a manufacturer of covered outpatient drugs below 10% of AMP were defined as “nominal sales” and generally excluded from Medicaid best price. While the final rule continues to define nominal sales as those sales at less than 10% of AMP, the best price exemption will now be limited to sales to: 340B covered entities, intermediate care facilities for the mentally retarded (ICF-MRs), and state-owned or operated nursing facilities.

Federal%20Upper%20Limit%20on%20Drugs.jpgFederal Upper Limits:

For twenty years, the federal rules have limited the amount state Medicaid programs may reimburse pharmacies for generic drugs. Using a Federal Upper Limit (FUL) for each affected drug product, the idea is to help ensure the government is a prudent buyer and pays close to market levels. Before the DRA, the FUL was set at 150% of the published price for the least costly therapeutic equivalent using all available national price compendia.

However, that never worked well. Over time, the old FUL system became very costly to states and problematic for nearly everyone involved.

As a result, the DRA changed the methodology used to establish a FUL on multiple source drugs:

  • A FUL will be established for each multiple source drug for which the FDA has rated two or more products as therapeutically equivalent, regardless of other formulations.
  • Multiple source drug now means a drug for which there is at least one other drug product rated as therapeutically equivalent.
  • FUL for multiple source drugs are now based on 250% of AMP. (Note that this has the added effect of making another powerful party – pharmacies – keenly interested in how well drug makers report their product AMPs.)
  • Outlier AMPs are excluded from the FUL calculation process. However, CMS is seeking public comments on the new outlier policy.

Requirements for Drug Manufacturers:

To accomplish all these changes in AMP and FUL, the law creates new requirements for pharmaceutical manufacturers. As I discussed in an earlier post, these new requirements, when coupled with the new approach to AMP, create significant financial, operational, and compliance challenges to pharma companies.

Most notably, pharma companies must:

  • Report pricing data to CMS on a quarterly basis, including AMP, best price, customary prompt pay discounts, and nominal price.
  • Submit monthly AMPs, calculated the same manner as the quarterly AMP, except the period is one month. Drug manufacturers must use 12-month rolling average to estimate lagged price concessions. Companies may recalculate and report their base date AMPs to CMS during the first four quarters after publication of the final rule. The rule allows manufacturers to recalculate their base date AMPs on a product-by-product basis if auditable.
  • Retain records used in calculating the customary prompt pay discounts and nominal prices reported to CMS.
  • Certify their quarterly and monthly pricing reports. Must be certified by the manufacturer’s CEO or CFO or designee. (Bet they’ll just love doing that.)

Rebates on Physician-Administered Drugs:

Before DRA, most States did not collect rebates on physician-administered drugs. Physician drug claims typically did not contain the National Drug Codes (NDCs) necessary for state to invoice drug manufacturers for rebates. Per the DRA, the CMS rule requires states to collect NDC numbers from providers to enable rebate collection on biologics and other physician-administered drugs in Medicaid.

This year, state Medicaid agencies must require providers to submit claims for single source, physician-administered drugs using HCPCS codes or NDC numbers that allow states to bill for rebates. Starting next year, states must require providers to submit claims for single source physician-administered drugs and 20 Secretary-specified, multiple source physician-administered drugs using NDC numbers. States that require additional time to comply may ask for a hardship waiver.