Monday, June 18, 2007

OIG's AMP Smackdown

Fans of the AMP battle (hey, who isn’t?) will surely want to read the OIG's just-released report Deficit Reduction Act of 2005: Impact on the Medicaid Federal Upper Limit Program. Hard for a guy like me to resist a report with such a captivating title!

Table 1 (page 9) will show you why the DRA was passed. For example, the average pharmacy acquisition cost for Lorazepam was 4 cents per tablet. Reimbursement to the pharmacy at the Federal Upper Limit (FUL) in the second quarter of 2006 was 57 cents – a mere (!) 13X mark-up. In case you didn’t know, there were 20 million Lorazepam prescriptions written in 2006, making it the 19th most prescribed generic drug in 2006.

As expected, OIG found that FUL amounts will decrease sharply under the new calculation method, in some cases dipping below acquisition cost. The new FUL amount for Lorazepam will drop to 3.3 cents, giving the pharmacy a gross margin of negative 21% (versus +93% under the old calculations). That’s gotta hurt!

CMS issued an unusually long rebuttal (attached to the OIG report), correctly pointing out that OIG should wait until the final regulations come out before running these numbers. Returning to the Lorazepam example, CMS estimates that the FUL in February 2007 is 6 cents, which provides a pharmacy with a gross margin of 33%.

Even so, a 30 day supply will only yield 60 cents of profit to a retail pharmacy. Hence, states may undo DRA savings by topping off AMP.

What’s Next?

No matter how you slice the data, the new rules for Medicaid's generic drug reimbursement will reduce pharmacy profits and change the distribution policies for manufacturers. Higher generic profits have encouraged everyone in the pharmacy supply chain to accelerate generic substitution. Will attacking inflated profits on generics start to tilt the balance back to branded manufacturers? Perhaps we should be careful what we wish for.

From what I hear, the AMP rule is currently being reviewed at the OMB. All signs indicate a release on or before July 1. Two big issues to watch: (1) the treatment of PBM rebates and (2) whether mail order is part of the retail class of trade. I personally predict that AMP will exclude PBM Rebates due to political pressure.

But much like the Sopranos so-called finale last week, I think we should all prepare for a definition of AMP that satisfies no one. Frankly, CMS will probably just

(cue Steve Perry and pass the onion rings)

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