Monday, February 12, 2007

AMPed down

Buried in the President’s FY2008 is a proposal to reduce the Federal Upper Limit for generic drugs from 250 percent of average manufacturers price (AMP) to 150 percent of AMP. (Fellow budget geeks can read it for themselves on page 159 of Major Savings and Reforms in the President's 2008 Budget.)

I’ve been pondering the impact of AMP on the supply chain for some time now. But to be honest, I missed this specific proposal in the budget. Keep in mind that the definition of AMP is not even finalized yet!

As I noted last week in Trouble Ahead for Independent Pharmacies, the Deficit Reduction Act will hammer independent pharmacies by lowering gross margins on generic prescriptions. But the 2008 budget proposal is not a surprise if you recall President Bush’s comment last year: “It’s not immoral to make sure that prescription drug pharmacists don’t overcharge the system.” Needless to say, that sentiment did not endear him to the pharmacy lobby.

I still predict that private payers will be migrating away from AWP to AMP-based pharmacy reimbursement, but I’m skeptical about other proposed metrics such as WAC. Take another look at my popular November post The Attack on Generic Profits in Drug Channels for strategic planning questions to help you figure out the pharmacy supply chain’s future market structure.

Since I don’t charge for this blog, I must also remind you that free advice costs nothing until you act on it. Caveat lector!


  1. Someone should tell the President and Congress that the real rise in drug costs is due to the manufacturors and not the drug stores and not the PBMs...they are just bean counters and bean distributors...the bean maker is the REAL PROBLEM. Drug Benefit News, Dec. 2006 reports ingredient costs for brands increased almost 80% from 2000-2006 and generics 73%. In real dollars: $53.16 to $95.46. Americans are paying for all those TV adds we watch that drug mfg are buying. Stop the ads and the price might go down.

  2. The retail pharmacists need to stop living on exorbitant generic mark-ups and start pressing for realistic mark-ups on all the prescriptions they dispense. This would be more defensible in the long run for the retailers.

  3. Interesting debate in these comments.

    As you'll notice, I permit anonymous comments. All comments still have to approved before posting.

    I'd prefer that people would post using their real names, but I recognize that it could squelch debate.


  4. I sympathize with pharmacists, particularly independents, who have little leverage with PBMs. Unfortunately, drug dispensing has simply become a low margin "loss leader" for selling sundries. Unless independent pharmacists can establish a new value proposition, they will continue to die out except in remote areas of the country.

    As for the original comment regarding drug ads, it is worth noting that the entire industry spend on DTC ads amounts to about 1% of sales. Thus, eliminating it completely would have no impact on drug prices.

  5. Brian ElsberndFebruary 13, 2007

    Is the perception that generics "overcharges" are what is driving up prescription drug costs? I thought that generics were the primary means of reducing drug costs, but apparently Congress feels that limiting reimbursement for generics, and thus making dispensing sole-source brands more attractive, to be the best means of saving money.

    That savings is probably illusory anyway because state legislatures are now looking at raising dispensing fees for generics. If they do, then those dispensing fees will soak up, through the federal match, any money saved through the lower FUL.
    In other words, changing the FUL for generics may just displace costs at the federal level without any actual savings.

  6. AnonymousMay 13, 2007

    How is WAC different from AMP?

  7. Re: WAC vs. AMP


    WAC is a manufacturer’s list price to wholesalers or direct purchasers, not including prompt pay or other discounts, rebates, etc. It is easy to understand b/c it is a "published" price set by a manufacturer.

    AMP is the actual (average transactional price. There is a lot of controversy surrounding how AMP should be calculated.



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