Tuesday, February 02, 2010

Won’t get FULed again

List-price based reimbursement took another hit last week in the long-running multi-district litigation concerning allegedly inflated list prices such as Average Wholesale Price (AWP) and Wholesale Acquisition Cost (WAC). The ruling disclosed truly eye-popping (50,000%+) spreads between pharmacy acquisition costs and the published list prices for generic drugs.

Once again, we learn just how flawed Medicaid’s existing Federal Upper Limit (FUL) computations have been for pharmacy reimbursement. The evidence of generic mega-spreads at retail pharmacies also provides a counterpoint to pharmacy owner complaints about Maximum Allowable Cost (MAC) programs and the redefinition of Medicaid’s Federal Upper Limit (FUL).


Judge Patti Saris, who is very familiar to regular readers of Drug Channels, issued her latest ruling last Wednesday for In Re: Pharmaceutical Industry Average Wholesale Price Litigation, MDL No. 1456, U.S. District Court, District of Massachusetts (Boston). Click here to download the 36-page ruling.

Here’s a sampling of the maximum spreads between WAC and acquisition cost cited in the decision:
  • Sandoz: 59,936%
  • Mylan: 33,641%
  • Par: 13,486%
  • Watson: 5,775%
  • Day: 3,998%
  • Teva: 2,955%
  • Barr: 1,841%
Judge Saris was not kind to the defendant manufacturers in the case, writing:
“As such, even viewing the facts in the light most favorable to the Defendants, and drawing all reasonable inferences in their favor, the Defendants knew that the list prices they reported were fictitious list prices.” (page 19)

Judge Saris' decision omits one important point—manufacturers did not earn these spreads; pharmacies did.

The spreads above reflect potential profits earned by pharmacies dispensing generic drugs and being reimbursed based on the generic drug’s list price. In fact, the period covered by this case (1997-2003) just so happens to be the era when retail pharmacies were earning $32 in spread from dispensing a generic drug in the Medicaid program versus a comparatively paltry $14 in spread from a brand. See for yourself.

Inflated list prices for generic drugs also make a mockery of the current Federal Upper Limit (FUL) computation since list prices such as AWP or WAC are such poor proxies of a pharmacy’s acquisition cost for a generic drug. Each manufacturer of a generic drug makes an identical version of the drug and then establishes its own list price for a particular strength and dosage of a generic drug. These prices can vary widely for an identical product.

See the problem? An individual pharmacy could earn a higher profit by dispensing the generic drug made by a manufacturer with a higher list price.

The FUL eliminates this crass loophole by establishing the maximum amount that a state Medicaid agency can reimburse a pharmacy based on the lowest list price for a particular multiple source (generic) drug.

The shortest giant can still be pretty tall, so generic mega-spreads can persist.


To prevent pharmacies from earning extraordinary profits from dispensing generic drugs, payers today either (a) establish deep discounts versus AWP for generic drug reimbursement or (b) use Maximum Allowable Cost (MAC) methods, which set a unit price limit on pharmacy reimbursement.

A MAC list creates a standard reimbursement amount for identical products, regardless of the manufacturer’s list price. And to the obvious displeasure of pharmacy owners, MAC lists prevent pharmacies from earning extraordinary mega-profits from dispensing generic drugs.

State Medicaid programs were slow to adopt these techniques. Ten years ago, only half of all state Medicaid programs had even bothered to establish a state MAC list for generic drugs. Today, 45 state Medicaid programs use MAC lists (source)
a greater percentage than the 7 out of 10 private employer prescriptions drug plans using MAC pricing for retail generic prescriptions. (source)

Redefining the Medicaid FUL to reflect actual pharmacy acquisition costs also makes sense when you consider the excesses of the prior era. The Deficit Reduction Act of 2005 (DRA) requires CMS to establish the FUL for multiple source drugs using the Average Manufacturer Price (AMP), a computed transactional price that (per regulations) “equals the average price received by the manufacturer for the drugs from wholesalers for drugs distributed to the retail pharmacy class of trade.” CMS is currently enjoined from using AMP for pharmacy reimbursement.


It’s useful to keep these economic realities in mind when you hear pharmacy owners complaining to Congress about MAC lists or suing CMS to prevent a redefinition of FUL. I believe that pharmacies should receive a reasonable—but not excessive—profit to run their businesses and retain incentives to promote generic use.

The pharmacy lobbyists have now accepted the reality of cost-plus pharmacy reimbursement, which is why the reform debate has shifted to arguments over “AMP + what %” instead of “FUL or bust!” See Fixing AMP: A Post-Brown Analysis.

In the meantime, expect the NCPA and NACDS to get on their knees and pray ... they don’t get FULed again.


  1. FUL is typically based on a mark-up of WAC, not AWP, but the overall point is the same.

  2. Judge Saris' ruling quotes an OIG study stating:

    “If there are three suppliers of the drug, the FUL system selects the lowest price (Average Wholesale Price, Wholesale Acquisition Cost, or Direct Price) that can be purchased by pharmacies and multiplies it by 150 percent.”


  3. Well stated and logical.

    Roger Daltrey! LOL!

  4. Good post, one of the open secrets in the generic industry is how this was going on back then.

    I assume you meant 'Dey' not Day in that list

  5. Hello Adam, and happy GH day to you.

    You need to review a few items a little closer in the gov report.

    1. Why do generic drugs gain such a higher dollar margin during this time frame? (Hint-- it's not just inflated AWP's).

    2. Single source generics and their impact on dollar margin. How does this impact overall drug spend, before and after the six month (honeymoon period) cutoff?

    3. Is retail pharmacy the only "winner" in this game?

    Clearly there was much margin in the late 90's and through 2006, yet I believe Judge Townsend Saris only hit 50% of the issue.

    You think the purchasers of the health care did their homework? She really s/b slapping the hands of our government workers for buying product so poorly!

    Oh yes, one more item. Do you think that PBM's have any "blind" products....maybe even generics...that they markup a grossly higher rate from what they charge their clients?

  6. Hey Adam,
    Great Post. What do you feel about prescriber dispensing in regards to state workers comp reimbursing? Do you think there is a conflict of interest there for physicians to directly dispense only the medications that have a high reimbursement rates based on the medi-cal fee schedule in California.

  7. I haven't looked at the Medi-cal program, so let me answer in general terms.

    1) Dispensers--pharmacies or physicians--deserve to earn a profit for services provided to the health care system.

    2) At the same time, payers have an obligation to ensure that dispensers don't game the system to line their own pockets.

    3) Public payers such as Medicaid must be especially vigilant in ensuring that dispensers do not waste our tax dollars.

    The available evidence suggests that state Medicaid agencies were asleep at the wheel. The good times lasted for awhile, but eventually led the Medicaid Commission to recommend AMP-based reimbursement formula reform in its 2005 report. This in turn led to the DRA and ultimately to today's "dragon-slaying" efforts.


  8. Bashing retail again....

    Lets talk MAC's, like the mac set by the pbm for my reimbursement and the "other" mac the pbm uses to bill plans with. The pbm sets the mac's for most plans. This is how the pbm makes more when I fill a prescription than I do. Filled 3 generic nasal sprays for a patient, patients copay 30.00, my total reimbusement 30.00, patients copay was 20% which means their self insured plan was bill 150.00 for the prescription.

    Not bad deal for the pbm, I fill the script and they make 120.00.....

    You need to take your blinders off.

  9. Adam,

    You are missing the forest for the trees. The current problem in the system largely is inherent because it incorrectly attempts to reimburse retailers based on the list or net price received by manufacturers, not the price paid by retailers.

    The food stamp program does not try to reimburse grocery stores based on the list or net price published by Kellogg's for its cereal. Obviously, Wal Mart can buy Kellogg's cereal much cheaper than can a corner bodega in the Bronx. The disparity would be even greater if one looked at Wal Mart's price for generic cereal versus the corner bodega' price for generic cereal.

    We all understand when we buy a convenience product from the corner bodega or 7-11 that we can buy the same thing for less money at Wal Mart. But we sometimes go to the bodega because it is more convenient.

    If we pay one reimbursement price to all retailers nationwide, then we need to accept the fact that we will dramatically over reimburse Wal Mart in order to subsidize the small independent retailer. We also could pay a price that only Wal Mart would accept -- thereby satisfifying the CBO and OIG -- but that would not be politically possible because it would drive small independents out of business.

    We also could reimburse based on actual costs paid by retailers or based on a survey of what retailers actually pay, after all discounts.

    It is absurd to attempt to derive retail reimbursement based on the net or list price of the manufacturer, two or three steps removed from the retailer, yet that is the impossible goal of the current system. The system is doomed to failure and, worse still, encourages constant witch hunts for the perpetrators causing this supposed "over reimbursement."

    Unfortunately, your post perpetuates the witch hunting.

  10. "You are missing the forest for the trees. The current problem in the system largely is inherent because it incorrectly attempts to reimburse retailers based on the list or net price received by manufacturers, not the price paid by retailers."

    I agree, so not sure what you mean by forest/trees. Cost-plus is growing as a reimbursement model. I've written extensively about the pros and cons of this alternative model.

  11. One problem with MAC is that they are often set at the GCN level. If you are a PBM setting a MAC, you search out the NDC with the lowest acquisition price and set the MAC for all NDCs in that GCN to the same level. The problem arises when the lowest acquisition price comes from a manufacturer that can't meet full market demand. When that happens, the MAC is often lower than the acquisition price of the drugs that are actually available on the market.

    MAC pricing also gives the PBMs too much opportunity to "make their numbers" by low-balling MAC's for a month. It takes retailers two to three weeks to feel the pain and feed back to the PBM that MACs are too low. It's a nice little once or twice a year bonus that PBMs enjoy paying themselves.

  12. Judge Saris looks remarkably like Roger Daltry

    Hopefully she will be in good form at the Super Bowl. “WHO dat,” indeed.

    But can HE write an opinion?

  13. Adam, the forest and trees guy has a real valid point!

    Our industry has always looked at cost plus to reimburse providers, attemtping to control costs.

    As an economist, do you think that the "food stamp"...or "drug stamp" approach would hold any water?

    Give a person based upon age a very valuable plastic card that get's "recharged" once a month with money.

    It's the consumers job to hunt out the best price to stretch their card value.

    It's no secret that many food stamp customers go grocery shopping at the sack'n save environments to stretch their stamps.

    Why not for drugs?
    Let the consumer take some control.

  14. Adam,

    The whole dispensing fee model needs to be thrown out. Base the reimbursement on a decent gross margin across the spectrum of brands and generics.
    It is transparent.

    What do you think is a "fair" profit for retail pharmacy?


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