Tuesday, November 16, 2010

New Study Finds Small AMP Impact, But Trouble in Six States

Regular readers know the unofficial motto of Drug Channels: "Everyone is entitled to their own opinion, but not their own facts."

Last Thursday, I posited that the forthcoming Average Manufacturer Price (AMP)-based Federal Upper Limits (FULs) for Medicaid reimbursement of multisource (generic) drugs would have only a moderate impact on the pharmacy industry’s profits. See What’s Happening with AMP and Pharmacy Profits.

I'm now pleased to bring you the results of a new study that confirms my opinions with actual facts. Ricky Goldwasser and her colleagues at Morgan Stanley conducted a valuable and original analysis computing how the new AMP-based FULs will affect pharmacy profits. Their methodology is much more rigorous and quantitative than my more informal explanation, but the conclusion is the same: "New AMP based reimbursement for generic drugs will have only limited impact on supply chain participants."

The Morgan Stanley research also makes an important contribution by showing that the impact of the new AMP-based FULs will vary based on geography. As the chart below shows, AMP-based FULs will be a non-event in most states, but pharmacies will face a painful adjustment in six key states that still rely on inflated FULs. Pharmacies in California and Connecticut will be hit the hardest.

When the facts change, I change my mind. What will the pharmacy industry's lobbyists do?

HONEY, I SHRUNK THE IMPACT

While I can’t share the entire Morgan Stanley report with you, the chart below summarizes the projected impact by state. Fascinating. (Click the chart to enlarge it.)

The chart makes it clear that many state Medicaid programs have already clamped down on excessive pharmacy reimbursement using their own State Maximum Allowable Cost (SMAC) lists. The new AMP-based FULs will be at or below these SMACs.

I’m amazed to see that some state Medicaid programs continue to over-reimburse pharmacies for generic drugs. Pharmacies in six states—Connecticut, California, Colorado, Texas, Arkansas, and Vermont—will see the biggest hit to profits as Medicaid reimbursements adjust to reality.

Budget-strapped California apparently finds itself on this list because of a pending lawsuit. As a result, the average pharmacy reimbursement in California for a generic drug in Medicaid is almost three times greater than the State of Michigan. Good thing California doesn't have any fiscal problems!

HONEY, I BLEW UP THE MARK UP?

Section 2503 (Providing Adequate Pharmacy Reimbursement) of the Patient Protection and Affordable Care Act (PPACA) states that the new FULs have a mark-up “no less than 175 percent.”

Hmmm, I can think of many numbers not less than 175 percent. CMS has been irritatingly vague about its plans, but here’s one scenario:
  • The Deficit Reduction Act of 2005 (DRA) stated that FUL amounts for most multiple-source drugs are to be based on 250 percent of the lowest reported AMP.
  • CMS issued a Final Rule in July 2007 to implement the provisions of the DRA.
  • The Final Rule issued last week withdrew provisions of the DRA that had been superseded by the PPACA—but did NOT withdraw the 250 percent figure.
Could CMS be planning to use 250 percent because Congress had previously established that rate and it exists in current regulations? If so, the impact on the pharmacy industry would shrink even more than the chart above indicates.

Of course, CMS’ bizarre reluctance to clarify major details just increases the likelihood of another lawsuit from the pharmacy industry. You can see the legal strategy in the infamous Secret AMP Letter sent by NACDS and NCPA to CMS. As a result, I’m still not convinced that the new AMP-based FULs will be published on time.

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Special thanks to Ricky Goldwasser and her team for conducting this study and for letting me share the results with you.

14 comments:

  1. Adam,

    How did they base their estimates? What year(s) did they use as a base? As a owner of pharmacies in Texas, I see reimbursements for generics very close or below my actual cost of product. If they used data from 2007 or earlier you cannot take their research very seriously.

    ReplyDelete
  2. In 2004 CBO chronicled the rising pharmacy markups under the old FULS system.
    http://cbo.gov/doc.cfm?index=6038&zzz=28387

    ReplyDelete
  3. AMP has not been finalized or published by CMS, so Morgan Stanley used generic acquisition data as an approximation of AMP. To determine current Medicaid generic reimbursement levels, they analyzed 33 State Medicaid MAC lists. You can contact Ricky Goldwasser for more details.

    But even if what you say is correct, it merely amends my headline to read "trouble in 5 states." The high-level conclusion stands: the new AMP-based FULs will have minimal impact.

    Adam

    ReplyDelete
  4. Thank you for the information.

    I guess I shouldn't be surprised that different states pay so differently, but it doesn't make a lot of sense. Do wholesaler selling prices really vary that much?

    I also want to know what you think happens now. Do you expect more lobbying with the states to change MACs or increase dispensing fees? What happens to national lobbying at CMS?

    ReplyDelete
  5. Those 5 states represent 20% of the Medicaid Rx spend (http://www.statehealthfacts.org/comparetable.jsp?typ=4&ind=179&cat=4&sub=47)

    ReplyDelete
  6. AMP derived reimbursement with or without a mark-up will not accurately reflect pharmacy acquisition costs as AMP has no meaning from a retail pharmacy perspective. AMP is also not currently subject to any validation process, is subject to retroactive adjustments and it is not readily available for products new to the marketplace. Lower cost generics, even with a 175% adjustment will typically pay below pharmacy acquisition cost. Higher cost generics with a 175% adjustment will typically pay well above the pharmacy acquisition cost. The only accurate and realistic mechanism to approximate acquisition cost is to collect acquisition cost data directly from pharmacy purchasers or their respective wholesaler on a monthly basis. This is the primary mechanism utilized for the most successful state maximum allowable cost programs, some of which are listed in the graphic from this study. This approach has been used successfully for many years in various state Medicaid programs.

    Mike

    ReplyDelete
  7. Post the Longs deal, California is the largest retail state for CVS at ~11.6%.

    Texas is 3rd at ~7.2%.

    Hmmm.

    ReplyDelete
  8. I'm sure you saw ...

    http://www.cms.gov/Reimbursement/02_Spotlight.asp

    ReplyDelete
  9. Great info. Thanks for sharing.

    ReplyDelete
  10. Adam States: A cost-plus model unbundles product price (revenues to the manufacturer) from the costs of distribution and dispensing (revenues to pharmacies, wholesalers, PBMs, and providers). In other words, the payer is defining a specific value ………………

    However I agree with Mike Sharp’s comments that AMP SPECIFIC VALUE should be Acquisition at the retail level.

    For our AMP accounts we define AQUSITON specifically as the price the average pharmacy, (i.e. fills ~62,000 Rxs per year), pays for a drug from our average wholesaler, we define average wholesaler as the average price that can be obtained from ABC, Cardinal, and McKesson for a particular drug.
    Jim Fields

    ReplyDelete
  11. Is average AMP really around $2.86 a claim? -- 175% of that amount is the $5.00 level shown in your graph. I find that average ACQ, or average pharmacy cost per claim, to be currently around $11.00 a claim. That is a significant difference between AMP=$2.86 and ACQ=$11.00 -- I would have figured they would be close to the same, not ACQ being nearly 4 times higher than AMP.

    ReplyDelete
  12. Adam States: A cost-plus model unbundles product price (revenues to the manufacturer) from the costs of distribution and dispensing (revenues to pharmacies, wholesalers, PBMs, and providers). In other words, the payer is defining a specific value ………………

    However I agree with Mike Sharp’s comments that AMP SPECIFIC VALUE should be Acquisition at the retail level.

    For our AMP accounts we define AQUSITON specifically as the price the average pharmacy, (i.e. fills ~62,000 Rxs per year), pays for a drug from our average wholesaler, we define average wholesaler as the average price that can be obtained from ABC, Cardinal, and McKesson for a particular drug.
    Jim Fields

    ReplyDelete
  13. AMP derived reimbursement with or without a mark-up will not accurately reflect pharmacy acquisition costs as AMP has no meaning from a retail pharmacy perspective. AMP is also not currently subject to any validation process, is subject to retroactive adjustments and it is not readily available for products new to the marketplace. Lower cost generics, even with a 175% adjustment will typically pay below pharmacy acquisition cost. Higher cost generics with a 175% adjustment will typically pay well above the pharmacy acquisition cost. The only accurate and realistic mechanism to approximate acquisition cost is to collect acquisition cost data directly from pharmacy purchasers or their respective wholesaler on a monthly basis. This is the primary mechanism utilized for the most successful state maximum allowable cost programs, some of which are listed in the graphic from this study. This approach has been used successfully for many years in various state Medicaid programs.

    Mike

    ReplyDelete
  14. In 2004 CBO chronicled the rising pharmacy markups under the old FULS system.
    http://cbo.gov/doc.cfm?index=6038&zzz=28387

    ReplyDelete

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