Does this change mean slowing momentum for acquisition cost pharmaceutical benchmarks? I don’t think so. Instead, California actions implicitly endorse the National Average Drug Acquisition Cost (NADAC) data now being collected and published by the Center for Medicare and Medicaid Services (CMS). California wants CMS to take the political hits (and spend the money) to build a new U.S. pharmaceutical pricing benchmark.
The pharmacy industry may want to stab CMS’s efforts with their steely knives, but they shouldn't want to kill this beast. As I see it, they should actually be breaking out the pink champagne (on ice) for cost-based reimbursement, which essentially guarantees pharmacy profits. Read on and let me know if you agree.
PLENTY OF ROOM
By way of background, an Acquisition Cost approach to pharmacy reimbursement computes a pharmacy’s ingredient cost reimbursement based on data collected directly from pharmacies. Average Acquisition Cost (AAC) data are now being collected and published by six state Medicaid programs: Alabama, Colorado, Idaho, Iowa, Louisiana, and Oregon.
In 2012, paralleling the states’ efforts, the Center for Medicare & Medicaid Services (CMS) began collecting and publishing a National Average Drug Acquisition Cost (NADAC) to, it said, “provide a national reference file to assist state Medicaid programs in evaluating their reimbursement.” (See Transparency is Here! CMS Exposes Pharmacy Prescription Profit Margins.) Forty-four state programs had previously asked CMS to develop a single national benchmark to set Medicaid reimbursement rates. (See Coming Soon: Average Acquisition Costs for Pharmacies.)
For much more detail on cost-based reimbursement, see Chapter 5 of our 2012–13 Economic Report on Retail, Mail, and Specialty Pharmacies.
SUCH A LOVELY PLACE
In 2011, California passed Assembly Bill 102 (Chapter 29, Statutes of 2011), which gave DHCS the authority to transition from an AWP-based pharmacy reimbursement methodology to a methodology based on actual acquisition cost for pharmacy products.
Under the law, California pharmacies would have received ingredient cost reimbursement for both brand and generic drugs at the lowest of:
- Average Wholesale Price (AWP) minus 17 percent
- Average Acquisition Cost
- Federal Upper Limit
- MAIC (Maximum Allowable Ingredient Cost)
BRING YOUR ALIBIS
The pharmacy industry has opposed AAC, but I say: Relax, and be programmed to receive a big potential upside in pharmacy profits. Here's why.
When the NADAC plan was announced in 2010, a group of pharmacy trade associations—American Pharmacists Association, the Food Marketing Institute, the National Association of Chain Drug Stores, and the National Community Pharmacists Association (NCPA)—argued that CMS had no authority to collect and distribute the prices that pharmacies pay for drugs. (See DC Fracas Over CMS Transparency Proposal.) In June 2012, the NCPA offered numerous other objections to NADAC, stating: “CMS is not authorized by Congress to collect NADAC data; thus, this represents an unfunded mandate on small businesses.”
But in my opinion, cost-based models offer a lower risk/lower return model for pharmacies. Current reimbursement models, whether based on a list price or a payer-determined maximum allowable cost (MAC), allow pharmacies to earn, on average, positive prescription gross margins. For generic drugs, a pharmacy can sometimes earn a very high profit on a prescription, but it can sometimes earn a low profit or even lose money on a single prescription.
A cost-based approach trades this volatility for an average margin with less variability. An AAC-based approach equates a pharmacy’s gross profit per prescription to the enhanced dispensing fee. State Medicaid programs in Alabama and Oregon have boosted the dispensing fees to $10 to $15 per prescription, based on the average cost-of-dispensing (COD). Thus,
Jon R. Roth, CEO of the California Pharmacists Association, suspects that the potential increase in California’s Medi-Cal dispensing fee would outweigh the savings from AAC. He tells Drug Channels:
“I am willing to bet the State revisited their calculations on the savings they would achieve on drug product side versus the increase in the dispensing fee that CMS would likely require them to implement. At the end of the day we estimate that those savings were not significant enough to offset the costs associated with implementing and maintaining an AAC pricing methodology.”I find his statement odd. Among states that do not use AAC, California’s Medicaid program already has the highest dispensing fee in the country.
SOME DANCE TO FORGET
As a bonus to pharmacies, the AAC may be inflated and/or manipulated, per my comments on NADAC when it was launched. Since NADAC excludes “discounts or rebates that are not listed on the invoice,” a wholesaler could raise invoice prices—while simultaneously increasing off-invoice, end-of-quarter rebates.
Of course, I’ve never, ever heard of a wholesaler doing something to increase a pharmacy reimbursement benchmark. Well, okay, there was that one time…
Those of us who spend time in the drug reimbursement hotel already know the truth: You can check-out any time you like, but you can never leave.