California Governor Gerry Brown just proposed legislation that would shift the pricing benchmark for Medi-Cal pharmacy reimbursement to average acquisition cost (AAC). Fans of transparency will be pleased to know that the AAC data will be deemed non-confidential. Click here to read the proposal (where AAC is confusingly referred to as “average acquisition price.”)
How much longer before the commercial market starts to incorporate these new data into their pharmacy benefit manager (PBM) and pharmacy contracts? How much profit pressure will transparency create for the pharmacy, wholesaler, and PBM industries? And how soon until a certain large pharmacy chain threatens to pull out of Medi-Cal?
FYI, Cost-Plus Pharmacy Reimbursement is one of the major trends that I analyze in The 2010-11 Economic Report on Retail and Specialty Pharmacies. If you haven’t already done so, may I humbly suggest that you make a small investment in your own professional development and download it today?
MEDICAID LEADS THE WAY (YES, REALLY)
Medi-Cal is California's Medicaid program. If this legislation passes, California will join Alabama and Oregon as cost-plus innovators in Medicaid. The U.S. Department of Health and Human Services is also behind this effort, as I pointed out two weeks ago in HHS Wants States to Control Medicaid Pharmacy.
Here’s what the proposed California legislation states:
“Average acquisition price” means the price determined by the department to represent the actual average acquisition purchase price paid for a drug product by retail pharmacies in California. The average acquisition price shall not be considered confidential and shall be subject to disclosure pursuant to the California Public Records Act.The dispensing fee will be increased to $7.25 for a retail pharmacy. Once the AAC data are up and running, the legislation also proposes dumping Average Wholesale Price (AWP), stating:
Average wholesale price shall not be used to establish the estimated acquisition cost once the department has determined that average acquisition price has been fully implemented.The state’s “Maximum allowable ingredient cost” (MAIC) for generic drugs will be based on the as-yet-unreported federal Average Manufacturer Price (AMP) plus a percent TBD.
Keep in mind that Medi-Cal is massively overpaying for generic drugs. The average pharmacy reimbursement in California for a generic drug in Medicaid is the second highest in the country. See New Study Finds Small AMP Impact, But Trouble in Six States.
COMING SOON TO A PAYER NEAR YOU?
The use of an external, government-collected average-cost benchmark is the most straightforward way for a payer to implement cost-plus pharmacy reimbursement.
As it happens, I was in Phoenix this week delivering a keynote address on The Future of Pharmacy at the Pharmacy Benefit Management Institute (PBMI). The audience included 300+ executives from health plans, self-funded employers, and PBMs.
Based on my conversations, the savvier plan sponsors are keeping a close eye on these developments. Up-and-coming PBMs such as Catalyst Rx (NASDAQ:CHSI), SXC (NASDAQ:SXCI), and Restat (private) are banking on a cost-plus, "transparency" revolution.
So, who will be the fourth state to join the Medicaid cost-plus party?