AWP: Dead Parrot or Just Resting?

Multiple people have emailed me in the last two weeks with variations on essentially the same question: Is Average Wholesale Price (AWP) no more? Has it ceased to be? Has it expired and gone to meet its maker? Bereft of life, does AWP rest in peace? If it wasn’t nailed down in many contracts, would it be pushing up the daisies? Has AWP rung down the curtain and joined the choir invisible?

In other words, is AWP an ex-benchmark?

Definitely. Maybe. Perhaps not. Here’s a quick update along with links to some helpful resources.

OUR STORY SO FAR

First Databank allegedly increased the spread between Wholesale Acquisition Cost (WAC) and Average Wholesale Price (AWP) from 1.20 to 1.25 on certain drugs in 2002. Many people first became aware of the situation through an October 2006 front-page story in the Wall Street Journal (How Quiet Moves by a Publisher Sway Billions in Drug Spending).

U.S. District Judge Patti B. Saris gave preliminary approval to a legal settlement in June 2007. There were two important elements of the settlement with regard to the publication of AWP:

• The WAC-to-AWP spread would be rolled back to 1.20 (if an NDC’s spread was higher) for all drugs
• FDB would stop publishing AWP no more than 2 years after the final court order

Since AWP is still widely used as a drug reimbursement benchmark for pharmacies, this proposed settlement affected the economics of many providers that were not involved in the lawsuit or settlement. In particular, pharmacy associations objected to the proposed class settlement, including the Pharmaceutical Care Management Association (PCMA), the National Community Pharmacists Association (NCPA), the National Association of Chain Drug Stores (NACDS) and the Food Marketing Institute (FMI).

In January 2008, Judge Saris rejected the original settlement and requested that the parties come back with a new settlement plan. An amended settlement was filed in June 2008 in which First Databank would roll back the AWP-to-WAC markup only for the subset of about 1,400 drugs identified in the original complaint, among other actions.

However, the amended (and still unapproved) settlement does not require First Databank to stop publishing AWP or roll back AWP on all drugs. Nonetheless, FDB has announced that it will unilaterally roll back the AWP for all drugs to 1.20 and discontinue publishing the Blue Book AWP data independent of the litigation. (See the June 2 letter on its website.) So the outcome would be the same (no more published AWP) although the currently proposed settlement does not technically require the demise of AWP.

Meanwhile, San Francisco and Connecticut have both filed suit against McKesson (MCK) regarding the company’s alleged role in the 2002 increase in the WAC-to-AWP spread. (See Connecticut sues McKesson on racketeering charges.)

MY TAKE:

1. AWP may not be quite dead yet, but it is certainly pining for the fjords (as discussed in the video below). For instance, other AWP lawsuits unrelated to FDB have created legal “speed limits” for the WAC-to-AWP markup. (See Judge Saris on Fictitious AWPs.)
2. Alternative list price benchmarks, such as WAC, are likely to become more common. Example: the Department of Defense’s TRICARE contract that I discuss in Big WAC Attack.
3. Where possible, pharmacy reimbursement relationships will be structured to maintain dollar-based economic arrangements regardless of the benchmark. Medco Health Solutions (MHS) discussed this issue in November. (See PBMs and AMP.)
   
4. Computed (non-list price) benchmarks such as Average Manufacturer Price (AMP) could one day become the norm for retail pharmacy, but the legal and publication status of AMP makes the timing very uncertain. (See my many posts on AMP for more.)

RESOURCES

• FDB AWP Communications
• FDB/Medi-Span AWP Settlement Website
• Hagens Berman Sobol Shapiro (court documents)

AND NOW FOR SOMETHING COMPLETELY DIFFERENT

Special thanks to John Cleese and Michael Palin for this video overview of AWP’s legal status:

An AMP Fix for Rural Pharmacies

Pharmacist trade associations are pursuing an aggressive, take-no-prisoners approach to “fixing” the Average Manufacturer Price (AMP) situation by citing the dangers to patient access if rural independents fail.

In fact, two recent studies support the idea that some rural communities could face access challenges if the local pharmacy closes. However, less than one percent of the U.S. population faces potential access problems and there are less than 2,000 at-risk rural pharmacies. In other words, the problem appears to be smaller and more fixable than pharmacy industry rhetoric.

So why not solve the rural access problem with a targeted solution for at-risk pharmacies that would cost much less and thereby have a greater chance of success? Rural pharmacists should be asking this question.

RISKS TO PATIENTS IN RURAL AREAS

Eric Shields, Pharm.D., maintains a blog and website for Montana pharmacists called GrizRPh. Eric is a self-confessed “avid fan of Drug Channels” (thanks!), but feels that I underestimate the dangers to rural pharmacies from AMP.

In an exchange with me following a recent GrizRPh blog post, Eric makes two compelling points about rural pharmacies:

• Access to healthcare would be compromised if a town’s only pharmacy closes and there are no viable alternatives within a reasonable driving distance.
• Pharmacies in rural communities can’t get bigger (as I suggest in Pharmacy Profits & Part D) because they serve small, fixed rural populations that are not growing.

These are very legitimate access issues for individual pharmacies, such as the store where Eric works now. Tobey Schule, RPh (owner of Sykes Pharmacy in Kalispell, MT) testified in May 2007 before the Senate Committee on Finance about the unique challenges facing his rural pharmacy. (Click here to read his testimony.)

THE SCOPE OF THE RURAL ACCESS PROBLEM

Alas, the plural of anecdote is not data.

To assess the prevalence of rural access problems, I found two recent studies that attempt to quantify the impact of access on individual communities or consumers. There may be more, but these two illustrate the situation.

• Reliance on Independently Owned Pharmacies in Rural America – “In over 2,000 rural communities, the only local pharmacy is independently owned, and in 1,044 of those communities, there is no other pharmacy within 10 miles.” The total population in these communities was 1.7 million people in 2000. This study, which was funded by HHS’ Federal Office of Rural Health Policy, also generated useful state-by-state maps.
  

• Consumer Access to Pharmacies in the United States – “Independent pharmacy consumers in rural areas typically have access to 14 competing pharmacies located with 15 miles of their current pharmacy.” This study was funded by the Pharmaceutical Care Management Association and cited by PWC in its study.

In other words, these studies imply fewer access problems than the exaggerated claims that 11,105 pharmacies will close due to AMP.

AN AMP FIX FOR RURAL PHARMACIES

If rural access is the real problem, then let’s find a solution to that problem.

How about we ask states to designate rural pharmacies that are the sole provider in a community as Critical Access Pharmacies (CAP)? These pharmacies would be eligible for higher dispensing fees that would be set based on the pharmacy’s cost accounting data. There should be about 1,000 to 2,000 such pharmacies in the U.S.

There is CMS precedent for this policy. Medicare designates approximately 1,300 small hospitals as Critical Access Hospitals (CAH). According to this MedPAC briefing document, CAHs are limited to 25 beds and primarily operate in rural areas. To qualify for the CAH program, a hospital had to be at least 15 miles by secondary road and 35 miles by primary road from the nearest hospital. States can also waive the distance requirement for a hospital declared to be a “necessary provider.”

Unlike traditional hospitals (which are paid under prospective payment systems), Medicare pays CAHs based on each hospital’s reported costs. Each CAH receives 101 percent of its costs for outpatient, inpatient, laboratory and therapy services, as well as post-acute care in the hospital’s swing beds.

RISK AND REWARD

NACDS, NCPA, or FMI are pursuing an aggressive, take-no-prisoners approach to a legislative AMP “fix.”

An alternative approach would be to advocate with Congress and/or CMS for a targeted, solution aimed at mitigating the specific risk of rural access. Judging by the studies cited above, a targeted CAP program would have much lower costs than an all-or-nothing AMP rollback. Therefore, it would be more palatable to lawmakers and perhaps more likely to get enacted.

My web traffic shows many readers of Drug Channels in the U.S. Senate and House of Representatives. Perhaps they can help pharmacy craft a winning solution for rural pharmacists.

Back to you, Eric.

AMP Delay Buried in New Medicare Bill

On Friday, Senator Max Baucus (D-MT) proposed a mammoth Medicare/Medicaid bill that further delays the implementation of Medicaid’s Average Manufacturer Price (AMP) provisions. Depending on your perspective, a delay would represent either the salvation of the pharmacy industry or the victory of emotion over economics.

The bill is called Medicare Improvements for Patients and Providers Act of 2008 (S. 3101). Here are some links for your reading pleasure:

• Official Bill Summary
• Full text of S.3101
• THOMAS listing (full Senate information)

The bill primarily focuses on proposed cuts in physician payments, as the AP headline makes clear (Bill would eliminate Medicare cut for doctors). The text of the bill runs to an awe-inspiring 259 pages.

AMP is addressed way down in Section 203 (on page 251 out of 259 in the full text). Two key points:

• Delays the use of AMP for Federal Upper Limits of multi-source (generic) drugs until at least September 30, 2009
• “Temporary” suspension of online publication of AMP data until at least September 30, 2009

Note that the new bill does not incorporate many elements of Senator Baucus’ previously proposed bill S.1951, which has been slowly gaining support. S.1951 now has 49 Senate co-sponsors, including Barack Obama (since last December) and more recently Hillary Clinton (since March). John McCain is not a co-sponsor.

Of course, this is Washington DC, so who really knows whether the AMP section will survive the inevitable earmarks and horse trading. But notch up another victory for the pharmacy’s lobbyists, who are definitely earning their pay!

11,105 Pharmacies Gone?!? Just More AMP Hype

A new report prepared by PriceWaterhouseCoopers (PWC) claims that 11,105 pharmacies will close due to the Average Manufacturer Price (AMP) provisions in the Deficit Reduction Act of 2005 (DRA).

• Press release from the National Association of Chain Drug Stores (NACDS) and the Food Marketing Institute (FMI)
• Impact of the Deficit Reduction Act of 2005 on Pharmacies by State (Full Report)

However, as I explain below, this report is fundamentally flawed in a way that will be immediately apparent to anyone familiar with pharmacy economics. In my opinion, the “findings” are not a reliable or accurate prediction of the actual outcome of AMP on the pharmacy industry. No one in the channel – manufacturers, PBMs, wholesalers, pharmacies, and payors – should use this report to plan business strategy.

QUICK OVERVIEW

The centerpiece of the report is a state-by-state estimate of the number of pharmacies that will close if AMP is used to compute the FUL. (See The AMP Saga Goes On and On and On for background.) There are many questionable methodological aspects behind these estimates, but the most significant assumption in PWC’s model derives from the variation in the 2001 average pharmacy net profit.

The average Net Profit reported in 2001 was 3.5% (as reported in the 2002 NCPA-Pharmacia Digest.) However, according to the self-reported data from the report: 13% of independent pharmacies had a net loss in 2001; 28% had a net profit of less than 2% in 2001; 33% had a net profit between 2% and 5% in 2002; and 26% had a net profit of 5% or more.

PWC’s model assumes that AMP would cause all pharmacies with negative net profits, i.e., a net loss, to close and also cause some percentage of pharmacies with “low” net profits to close.

BTW, Dr. Schondelmeyer’s November 2007 report from the AMP lawsuit used a similar approach to come up with the “loss of 10,000-12,000 pharmacies” guesstimate that has been cited up until now.

PHARMACY ECONOMICS 101

Understanding the flaw in the report’s method requires a quick review of a retail pharmacy’s income statement:

• Gross Profit = Revenues minus Cost of Goods Sold (COGS)
• Net Profit = Gross Profit minus Operating Expenses
• Operating Expenses = Owner compensation + Payroll Expenses (excluding owner’s comp) + Other Expenses (rent, utilities, etc.)
• Owner's Discretionary Profit Before Tax = Net Profit + Owner Compensation
  

Key insight: A reduction in reimbursement has no direct effect on a pharmacy’s Net Profit.

A reduction in reimbursement, such as the use of AMP for FUL computations, lowers Gross Profit by reducing Revenues (assuming no change in COGS, among other things). However, the impact on net profit depends on whether a pharmacy can alter its operating expenses in response to a decline in Gross Profit.

If a pharmacy’s costs are entirely fixed regardless of changes in reimbursement, then a reduction in reimbursement translates directly into a loss of net profit. However, the impact on net profit would be less significant if a pharmacy can adjust its expenses in response to a change in reimbursement levels.

OPERATING LOSS OR TAX STRATEGY?

A private business may report an “net loss” for many reasons that do not relate to the true financial health of the business. For example, there could be tax minimization benefits for a business owner from reporting a low or negative net profit while generating high personal income for the owner.

Thus, the “average” pharmacy could have reported an “net loss” if the average pharmacy owner had chosen to pay himself or herself a larger bonus of instead reporting a positive net profit on the NCPA survey. In other words, a decline in Gross Profit could be offset by a reduction in profits to the owner without causing the business to shut down.

I’m no accountant, but a “global market leader for tax services” such as PWC should have considered these financial issues in their computations. If you understand these matters, then you too will question the core assumption that 13% of pharmacies with a “negative net profit” will automatically close.

So here’s another way to think through the math.

• PWC estimates that average pharmacy net profits drop by $23,300 due to DRA.
• The most recent data reported (2003) put Owner's Discretionary Profit Before Tax at 8.1% of revenues.
• Using the most recent average revenue data of $3.6 million per independent pharmacy implies that Owner's Discretionary Profits were about $293,000.

Unfortunately for owners of independent pharmacies, the most obvious way to stay in business would be to reduce average pharmacy owner compensation by $23,300 to about $270,000 per year.

Personally painful? Yes. So the real (and still unanswered) question becomes: At what point will an independent pharmacy owner decide that the Owner's Discretionary Profit is too low and shut down or sell the business?

BOTTOM LINE

Look, I understand what’s going on. Pharmacists want to be compensated appropriately for the value that they contribute to U.S. health care. I fully support pharmacists’ First Amendment rights to advocate on behalf of their own interests. See In Defense of Lobbyists from Friday’s Wall Street Journal for a spirited POV on this subject.

I’m just bothered that pharmacists are making the case using misleading analyses rather than explaining their true value to the health care system or confronting the cross-subsidies of the pharmacy economic model. I’m disturbed to think that this report might be used by outside parties to predict the actual impact of DRA. I also suspect that many independent pharmacists may begin to believe (falsely) that AMP is the single biggest threat to their collective survival.

Just to be clear, I have no stake in the outcome of the AMP battle. I’m not being paid to write this blog nor do I get paid for advocating any particular position regarding AMP. I don't have a grudge against retail pharmacists - honest!

But I do believe strongly in the value of independent expert analyses. Unfortunately, the latest AMP report appears to be political theater designed to influence policy makers rather than a genuine attempt to quantify the impact of AMP. Too bad.

The AMP Saga Goes On and On and On

There are some new developments for Average Manufacturer Price (AMP), although the situation has now devolved into a somewhat arcane legal battle. Unless there is a legislative fix (unlikely), then I expect that CMS will punt this issue to the next administration in 2009.

OUR STORY SO FAR

As a reminder, the Deficit Reduction Act of 2005 required the Center for Medicaid and Medicare Services (CMS) to set the Federal Upper Limit (FUL) on payment for generic drugs at AMP plus 250 percent. The FUL is currently computed using the Average Wholesale Price (AWP) list prices, although some states opt to establish reimbursement limits below FUL at maximum allowable cost (MAC).

The change to AMP was advocated in September 2005 by the Bipartisan Commission on Medicaid Reform and the National Governor’s Association. This change was made in part because pharmacies were earning extraordinary profits from dispensing generic drugs in the Medicaid program.

In 2002, filling a script for a generic less than 5 years old gave a pharmacy $32 in “spread” – the difference between Medicaid reimbursement and acquisition cost. Filling a branded script yielded a comparatively skimpy $14 spread. (Source: Medicaid’s Reimbursements to Pharmacies for Prescription Drugs, a December 2004 CBO report that always generates hate mail from my pharmacist readers.) Private insurers, in the form of Medicare Part D plans, have done a better job at equalizing the dollar margins for brands and generics. (See Pharmacy Profits & Part D.)

CMS issued its Final Rule for implementing the AMP provisions of the DRA in July 2007. NACDS and NCPA, the two leading pharmacy trade associations, filed suit against CMS. To my surprise, they got an injunction that prevented CMS from adopting the AMP-based pharmacy reimbursement formula and publishing AMP data on the Internet. If you believe the over-heated rhetoric, then this legal delay saved up to 12,000 pharmacies from financial ruin.

COMING NOT-SO-SOON

More recently, NACDS and NCPA have opposed CMS’ subsequent clarification of “multiple source drugs” (a.k.a. generics) based on two technical legal objections. Yesterday, the two organizations were granted permission to file an amended complaint that challenges this new multiple source drug rule. The wheels of justice can grind slowly, so I don’t expect a resolution anytime soon.

Legislative action continues via pleas to pass The Fair Medicaid Drug Payment Act of 2007 (S.1951 and H.R. 3700). Neither bill has progressed very far. Senator Baucus, who sponsored S.1951, seems preoccupied with delaying the Medicare physician fee cut for 18 months. Perhaps Congress will feel generous since they voted on Thursday to delay seven new Medicaid regulations.

Just in case, NACDS sent a letter to Congress that asks for joint passage of the AMP bills along with unrelated bills about e-prescribing in Medicare. I presume the unstated motivation is to link the purported savings from e-prescribing to the extra costs of the Medicaid AMP increase.

NOT THE END

So, we are not very close to resolution, which is perhaps a small net benefit to pharmacies. I’ll occasionally check in on our old friend AMP but will primarily turn my attention to other topics until some big news breaks.

Wrestling with AMP

CMS won’t appeal the preliminary injunction against the full implementation of the Average Manufacturer Price (AMP) Final Rule. So, there’s still No AMP for You, at least until CMS regroups. But stay tuned because industry insiders are now rallying behind a Senate bill that will fix AMP once and for all.

AMP-Mania XI

Gosh, it’s hard to believe that the AMP Injunction is already 11 weeks old!

Drug Topics recently ran a cover story called Bracing for a Showdown, which has a useful background on the AMP story from the pharmacists’ perspective. I pop up in paragraph 51 (out of 53) to scare the daylights out of pharmacists by stating:

“Pharmacists are being exposed to economic realities that they haven't faced before that are removing protections that protected them from fundamental economic realities. Retail pharmacy is now experiencing what has happened in other retail sectors over the past 25 years. Pharmacies need to get big, get focused, or get out.”

TOTAL NONSTOP ACTION

NCPA has posted its two most recent submissions to CMS related to the Final Rule:

NCPA’s Comments on CMS’ Final AMP Rule

Appendix to NCPA Comments

The Appendix is by far the more interesting document because it attempts to support NCPA’s claims that roughly half of all independent pharmacies will vanish due to AMP. Rather than rebutting the statistically shaky claims in the Appendix document on the blog, I will simply suggest that you re-read my Pharmacy Profits & Part D post as well as the comments to that post.


I wonder if the Editors of Drug Topics secretly agree with me about the exaggerated claims of harm from AMP. They chose to illustrate the showdown using the metaphor of professional wrestling – a “simulated sport and performing art.” (!)

S.1951 TAGS IN

I recently had the opportunity to ask Kathleen Jaeger, President and CEO of the Generic Pharmaceutical Association, about the future of AMP. She told me that there will be a coordinated legislative push this Spring for S.1951 (a.k.a. The Fair Medicaid Drug Payment Act of 2007). The first volley was sent Tuesday by NACDS with this letter to Senate and House leaders.

This bill, which has been referred to the Senate Finance Committee, has 42 co-sponsors, including Senator Barack Obama (but not Senators McCain or Clinton). I covered the key points from this bill in Last Ditch Effort for S.1951 last November, when there was an attempt to get movement before the Winter Recess.

CMS has not even bothered to update its own page on FUL since the injunction, so the momentum remains with the pharmacy industry. As scholar and philosopher "Rowdy" Roddy Piper, Ph.D., once said: "Just when you think you know the answers, I change the questions."

Big WAC Attack

As regular readers know, I have boldly (foolishly?) predicted that "list price" pharmacy reimbursement models such as Wholesale Acquisition Cost (WAC) are unlikely to replace the long-maligned Average Wholesale Price (AWP) list price benchmark. Many people, including yours truly and the CFO of Medco Health Solutions (MHS), expected Average Manufacturer Price (AMP) to emerge as a new retail reimbursement benchmark rather than WAC.

While I may still be proven correct, events over the past few months have changed the near-term dynamic. The publication of AMP is on hold for now, while AWP may be getting a reprieve. And last week, the Department of Defense gave a big boost to WAC as a pricing benchmark for pharmacy reimbursement, breathing new life into this alternative list price.

AWP: NOT DEAD YET

Before turning to the latest WAC news, let's catch up on the fate of AWP.

As you may recall, Judge Patti B. Saris issued an order granting preliminary approval to the First Databank (FDB) settlement last June. There are two important elements of the settlement with regard to the publication of AWP:

• The AWP-to-WAC markup would reduced to 1.20 (if an NDC’s ratio was higher)
• FDB would stop publishing AWP no more than 2 years after the final court order

However, final approval of the settlement was subject to a fairness hearing. As I mentioned last month in Pharmacy Profits & PBM Contracts, a number of pharmacy associations objected to the proposed class settlement, including the Pharmaceutical Care Management Association (PCMA), the National Community Pharmacists Association (NCPA), the National Association of Chain Drug Stores (NACDS) and the Food Marketing Institute (FMI).

Guess what? Judge Saris rejected the settlement on January 22 and requested that the parties come back with a new settlement plan. Apparently, Judge Saris is also reluctant to force First Databank or Medi-Span to stop publishing AWP.

Another legal victory for retail pharmacy – you can see NACDS dance in the end-zone in this press release about the proposed settlement.

HOW ABOUT WAC?

Wholesale Acquisition Cost (WAC) has been touted as a replacement for AWP. WAC is the manufacturer's list price to drug to wholesalers or direct purchasers, excluding prompt pay or other discounts. (See Section 1847A(c)(6) of the Social Security Act.)

Nine states currently incorporate WAC into ingredient cost reimbursement formulas for retail Medicaid prescriptions. In addition, NACDS proposed WAC-based reimbursement for brand drugs in June 2005 Congressional testimony, a position that they reiterated in a February 2007 comments about AMP to CMS.

Even if the original settlement had gone through, WAC would still have been available, as indicated on FDB’s web site: “First DataBank will continue to publish all other available drug pricing information, including WAC, Direct Price, and suggested wholesale price, as well as our clinical drug information.”

TRICARE LIKES WAC

In case you don’t know, TRICARE provides a pharmacy benefit to all eligible Uniformed Services members called TRICARE Pharmacy Program Services (or TPharm to its friends). Eligible beneficiaries may fill prescription medications at military treatment facility (MTF) pharmacies; through the TRICARE Mail Order Pharmacy (TMOP); at TRICARE retail network pharmacies (TRRx); and at non network pharmacies. Express Scripts (ESRX) currently has both the retail pharmacy and mail order contracts.

On Tuesday, the Department of Defense issued a consolidated (TMOP & TRRx) Request for Proposal (RFP) for TPharm. You can savor the RFP for yourself by visiting the homepage for Solicitation No. H94002-07-R-0004. (Hey, my lucky number!)

I am quite intrigued to see that WAC is the pricing benchmark.

For example, the “Total Expected Government Cost for Reimbursement of Retail Network Pharmacy Costs” (or TEGCFRORNPC) is computed using WAC (minus a discount from WAC and plus a dispensing fee). The Government also provided average WAC data for non-specialty brand name, non-specialty generic, specialty brand and specialty generic prescriptions under TPharm. (See Section L Attachment 6.)

While the DoD validates WAC for now, I still expect computed (non-list) benchmarks to become the norm for retail pharmacy. In the meantime, I will take my own advice about forecasting: Give an event or a date, but never both.

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P.S. Check out the new Health Wonk Review, a collection of blog posts about health care and the pharma industry. My recent post about Wal-Mart is included.

Text of the AMP Injunction Order

At long last, we can finally see the Order granting the injunction against CMS’ implementation of the Average Manufacture Price (AMP) Final Rule.

Order in Civil Action No. 1:07cv02017 (I’m pretty confident that this is the final version because it says “Signed by Royce C. Lamberth, United States District Judge, on December 19, 2007.”)

Fans of legal wrangling will enjoy the back and forth between CMS and NACDS/NCPA over the wording of the final version. See these documents on the NCPA site. (The final version above was not on NCPA's site as of 8:30 PM EST on Wednesday night.)

The Order is two pages and contains only a few provisions. Here’s my plain English translation:

CMS can not use AMP Final Rule to compute retail pharmacy reimbursements under Medicaid. Obviously, this was the primary goal of the lawsuit.

CMS can continue to require drug manufacturers to make AMP and best price calculations under the AMP Final Rule. As I speculated on Monday, manufacturers faced the prospect of maintaining dual AMP calculations until the lawsuit got resolved. PhRMA explained this reality to the court in its letter on Tuesday. The Order clears up the uncertainty.

No AMP data can be disclosed on a public web site or to any individuals or states. NACDS and NCPA fought for this provision because of a recent survey indicating that nine states were considering AMP as the basis for brand reimbursement. (See page 5 of 2007 State Perspectives Medicaid Pharmacy Policies and Practices.)

Well, I hope this post satisfies the AMP fanatics. Now I've got to go back to packing for my vacation!

Drug Channels: 2007 Year in Review

Believe it or not, it’s time for my final post for 2007.

In the spirit of the season, I want to highlight the major themes of 2007 along with my good calls and near misses. I also want to give you some insights about the Drug Channels blog and its future.

There were 114 posts on Drug Channels in 2007, so this is a very long post. However, you will be rewarded with a hilarious video from now-bankrupt drug wholesaler FoxMeyer if you make it to the bottom.

Shining Light on Pharmacy Economics and the Pharmaceutical Supply Chain

My philosophy in writing this blog can be summed up with a quote from the late Senator Patrick Moniyhan: “Everyone is entitled to his own opinion, but not his own facts.” In my own way, I want to bring facts and balance to subjects that don't get sufficient or accurate coverage from traditional media outlets.

I was proud to break the story about CVS’ lawsuit with Prasco over generic pricing in CVS' Channel Power. Following coverage on Drug Channels, the story was picked up by Pharmalot, Drug Topics, The Pink Sheet, and a few Wall Street analysts. This was my big scoop of the year, even though information about the lawsuit was already in the public domain.

Retail pharmacy proved to be extremely effective at defining the legislative agenda and terms of debate, as I pointed out in Retail Pharmacy's New Power and correctly predicted in January's Lobbying for Pharmacy Profits. While an unprecedented number of pro-pharmacy bills were introduced in Congress, none of the major bills passed despite a Last Ditch Effort for the Senate’s AMP bill S.1951.

I also made some new enemies this year by analyzing how research results were misrepresented to score political points in A Misleading Study on Pharmacy Reimbursement and Hype vs. Research. See the comments beneath each post for a taste of the vitriol. I added insult to injury by pointing out how Part D is proving the value of consumer-directed healthcare.

Drug Channels was also one of the few places to read about the real economics and impact of Wal-Mart’s $4 generics program in Wal-Mart's Gain is not Walgreen's Pain and Wal-Mart adds some $4 generics (yawn).

I also tried to write about channel management from the manufacturer’s perspective. We should never forget there would be no pharmacy or pharmaceutical supply chain without the innovative therapeutics developed by pharmaceutical manufacturers. For example, I followed Pfizer’s new UK distribution model throughout 2007. Pfizer beat back the legal challenges, but then faced an investigation by the Office of Fair Trading (OFT). I overestimated the likelihood of an unfavorable OFT report in Pfizer's UK Plan in Trouble, but hopefully redeemed myself by going Behind the Scenes of Pfizer UK and then explaining what the OFT’s toothless report could mean for the U.S. marketplace.

Average Manufacturer Price (not)

Average Manufacturer Price (AMP) was one of the most popular topics on Drug Channels. We will undoubtedly be hearing much more about AMP, despite the recent injunction covered in No AMP for You!

I worked hard to give you an independent, non-partisan perspective on the impact of AMP. I provided my Comments on the AMP Final Rule just two (weekend) days after it was released and followed up a few days later by analyzing Reactions to AMP from the pharmacy industry. (They didn’t like it.) I explained Why AMP will not be Independents' day, calculated AMP's Impact on Pharmacy Profits, described why PBMs are not worried about AMP, and told you why AMP is Unloved and Unwanted (sniff) by manufacturers. I correctly predicted in May that CMS would exclude PBM rebates from the Final Rule (AMP will exclude PBM Rebates).

I also used Drug Channels to balance the doomsday visions put forth by certain pharmacy in Heretical Questions about the AMP War. Alas, this post did not win me friends at retail pharmacy trade associations, although the many comments from pharmacists indicate a grudging respect and even occasional agreement among actual pharmacists. The Illinois Pharmacist Association even conceded that Drug Channels is “thoughtful and in a lot of ways hard to argue with.”

I even managed to slip in some AMP humor in Death by AMP – an especially popular post in 2007!

The post-AWP Future

Anyone interested in the future of pharmacy reimbursement had plenty to read on Drug Channels this year.

I reviewed the Judge’s original ruling in the Average Wholesale Price (AWP) litigation last June in Comments on the AWP Decision and then followed it up by looking at the damages ruling and Judge Saris’ comments on fictitious AWPs. In my opinion, these decisions will effectively end the consideration of alternate "list price" pharmacy reimbursement models as replacements for current AWP minus models.

As I noted in ASP History Lessons, the introduction of Average Sales Price (ASP) reimbursement for Medicare Part B did not signal disaster for community oncologists or their patients. In fact, The ASP Future is Here because private health plans are already using Medicare’s ASP data for reimbursement, making me think that AMP (if ever published) will become the new pricing benchmark for retail scripts.

On January 1, 2008, CMS will pay for most Part B outpatient drugs at ASP+5%, which is a 1 percentage point drop from the current ASP+6%. It’s one more reason for pharmacies and providers to be anxious about the post-AWP future.

Counterfeiting and Security

Supply chain security was another hot topic at Drug Channels.

California’s looming 2009 e-pedigree deadline has manufacturers, wholesalers, and pharmacies scrambling to comply while also lobbying for a full or partial extension. In one particularly well-clicked post, I highlighted Virginia Herold’s trial balloon regarding a CA e-pedigree delay to 2011. Of course, she quickly backtracked from these comments, but I think a two-year delay or a phased implementation (per California Dreamin') is still very likely.

I generated some controversy by exploring the facts and myths behind much-hyped RFID solutions in RFID Un-Hype and More RFID Un-Hype. Check out the comments to those posts for some intriguing back-and-forth with DC readers.

I also attempted to present a unique supply chain spin on a few big media stories. PDUFA & Supply-Chain Security was one of very few resources to highlight the serialization requirements buried inside the Food and Drug Administration Amendments Act of 2007 (FDAAA). I even wrote about Presidential candidate John Edwards’ surprising embrace of track-and-trace technology in John Edwards and ... Pedigree?

Importation and Diversion

I am convinced that importation (a.k.a. legalized diversion) is risky due to my knowledge and experience about pharmacy supply methods. Unfortunately, mainstream media coverage does a poor job of connecting pharmacy and consumer behaviors to the patient safety dangers posed by importation. That’s why I explained the channel impacts behind importation and the fact that importation won’t really save much money.

My snarky posts about Senator Byron Dorgan – especially Consistent Inconsistency – generated fan mail from Washington, DC. (Sorry, only via private e-mail.)

I rounded out my coverage by writing about the fallacy of safe Canadian sourcing (Canadian Dreamin' and Diversion from Canada via China), how and why internet pharmacies Import Chinese Counterfeits, and why you should not buy Fosamax from Tony Soprano. Hey, never say that I don’t provide real-world tips!

Unfortunately, two of the three big drug wholesalers (AmerisourceBergen (ABC) and Cardinal Health (CAH)) faced DEA suspensions for supplying controlled substances to diverting pharmacies. Cardinal has now had suspensions at facilities in Washington, Florida, and New Jersey despite its December 2006 agreement to monitor pharmacies more carefully. I’m sure we’ll learn much more about this story in 2008.

And now a word from your host

I make Drug Channels freely available as part of my mission to educate, inform, and challenge people. I feel fortunate to have been similarly educated in many private emails and conversations that were sparked by the blog. So please keep emailing me with topics, questions, or news articles. I respond personally to all emails.

I am also gratified that readership of Drug Channels soared in 2007. Each week, there are a few thousand visitors on the site compared to only a few hundred in January. Drug Channels is frequently cited by many bloggers and reporters.

Your Reward: FoxMeyer Nostalgia

Congratulations for making it to the bottom of my 2007 review!

Enjoy this jaw dropping clip of a “motivational” meeting led by the senior executives from once-mighty FoxMeyer, which was acquired by McKesson through bankruptcy court proceedings in 1996. The hilarity starts at 1:23. Ah yes, the glory days when top execs would lip sync and dance on stage. I particularly enjoyed “Tim Beauchamp, Distribution Man” at 4:03, although he was a bit pitchy.

Hat tip to On Pharma.
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I'll be back during the week of January 8. Until then, I wish you a healthly and happy new year!

All the best,
Adam

No AMP for You!

Well, pierce my ears, and call me drafty!

On Friday, U.S. District Court Judge Royce Lamberth granted an injunction that will prevent CMS from adopting the AMP-based reimbursement formula for generic prescriptions in Medicaid until he has reportedly “had an opportunity to fully review the new payment plan.” CMS will also not be permitted to post Average Manufacturer Price (AMP) data on the Internet as planned.

The injunction stemmed from a lawsuit brought by NACDS and NCPA against CMS. (See the NCPA’s Legal Proceedings page for links to the case documents.) In Analysis of AMP Lawsuit Odds last month, I incorrectly predicted that the injunction would not be granted. (Thanks a lot, Arnie Becker!) Naturally, I will be happy to refund your subscription fee to Drug Channels.

Here are some initial reactions to the injunction:

CMS was over confident. One interesting revelation from this lawsuit was the fact that CMS intended to publish the AMP data in “mid-December.” The comment period for a related portion of the AMP rule closes on January 2, 2008, leaving very limited time for detailed challenges or data analyses. Last week, I attended a conference in which one speaker (a DC lawyer) said: “CMS feels very strongly that what they’ve done is correct.” Their Memorandum of Opposition did not even bother to rebut the marketplace impacts outlined in the expert report submitted by NACDS and NCPA.

Pharmacy lobbyists won the PR battle. NACDS and (especially) NCPA repeatedly claimed that AMP was only about “access for low-income patients.” They currently claim that the DRA (by itself) will lead to the closure of 10,000 to 12,000 pharmacies. These claims have been asserted and repeated without evidence even when objective reality provides factual reasons to doubt the claims. It helps that AMP is unloved and unwanted by almost everyone. I honestly wonder whether pharmacy advocates genuinely believe their own claims. There’s a useful lesson in doublethink propaganda here.

Pharmacies get a (small) profit reprieve. The larger chains, such as CVS and Walgreens (WAG), have not publicly quantified the impact of AMP, although the effect would not have been very large. Keep in mind that the DRA will only reduce retail pharmacy revenue by half of one percent annually – hardly the difference between poverty and riches (and hardly enough to sink 12,000 pharmacies).

Manufacturers will incur higher short term costs. Based on the latest timeline, manufacturers have already reported October 2007 AMPs using the new definition. If so, then manufacturers may need to run two parallel systems (Old AMP and Final Rule AMP) until the lawsuit is resolved. Manufacturers may even need to recalculate and resubmit their recent AMP data based on the old calculations.

The post-AWP future looks hazier. Average Wholesale Price (AWP) is still the primary benchmark for determining pharmacy reimbursement despite its well-known shortcomings and the short lifespan. I have previously suggested that AMP seemed to be a likely candidate for a replacement benchmark, especially for Part D plans. Payers and PBMs will be keeping a close eye on this case.

The government gets beaten (again). Last December, the FDA was successfully blocked from implementing the pedigree requirements of the Prescription Drug Marketing Act. (See No PDMA for you!) I wonder if these successes will increase the chances of a December 2008 injunction against the California Board of Pharmacy regarding e-pedigree.

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I'll post again after I've digested the Injunction. In the meantime, I now need to revise my 2007 Year in Review!

U.S. Lessons from Pfizer UK

The UK Office of Fair Trading (OFT) just released its report on the new direct-to-pharmacy (DTP) distribution model being used by Pfizer and Alliance Unichem.

Their bottom line: Control of distribution could allow Pfizer to profit at the expense of the UK government, which might end up paying “hundreds of millions of pounds a year.” The headlines have predictably focused on this rather theoretical conclusion. (Example: OFT says new drug deals could cost NHS millions in the Times of London)

The more intriguing story are the reasons *why* the British government (a single payer) dislikes Pfizer’s plan. As I explain below, I think that the OFT report gives us fresh insight into why U.S. payers will care more about U.S. manufacturer channel strategies in a world of cost plus, Average Manufacturer Price (AMP) based pharmacy reimbursement.

Nudge Nudge

I’ve been covering Pfizer’s plan since it was announced 15 months ago and recently gave you some behind-the-scenes insights from the Director of Commercial Operations at Pfizer UK. You can read Pfizer’s description of the program on their UK web page.

Here’s some brief background to help you understand the following OFT report materials:

• OFT makes recommendations to Government on UK medicines distribution – Press Release


• Medicines distribution: an OFT market study – Full report (Warning: It’s verbose, repetitive, redundant, and repetitive)

In the UK, manufacturers give wholesalers a discount of 12.5 percent off list price. Competition between wholesalers means that wholesalers pass 10.5 percent of their discount (84%) to retail pharmacies. Wholesalers get reimbursed for dispensing by the UK government’s National Health Service (NHS) based on list price.

However, the National Health Service (NHS), which is the UK government payer, gets to clawback any “excess profits” that a pharmacy earns from high discounts. This mechanism allows the single government payer to pay below list price because it shares in the financial gains of savvy purchasing by pharmacies.

The Ministry of Silly Reports

The OFT fears that the DTP model will reduce wholesaler competition, thereby shrinking the discount off list offered to pharmacies. The NHS would end up paying “hundreds of millions of pounds a year” because there will be less for the government to clawback from pharmacies. The OFT is also concerned that manufacturers will try to save money by reducing service levels to pharmacies and ultimately patients.

The core reasoning behind OFT’s anti-competitive fears appears in section 5 (pages 73-83) of the full report. It’s somewhat slow going, especially because the arguments are made without specific data or quantification.

Critically, the OFT does not recommend anything stronger than “monitoring the situation.” Translation: These (so far) theoretical concerns do not merit any formal actions.

And Now For Something Completely Different

The UK discounting dynamics will sound familiar to U.S. market participants. Here in the U.S., drug makers give certain discounts or fees only to wholesalers. The large buyers play the wholesalers off against each other and extract most of these discounts and fees. Just look at the recent negotiations between Cardinal Health (CAH) and CVS for an example.

But unlike the UK, U.S. pharmacies get to keep any extra profits gained from squeezing the wholesaler. “AWP minus” reimbursement creates powerful incentives for pharmacies to seek lower drug prices from their wholesale suppliers. Medicare and Medicaid do not financially benefit from higher spreads at the pharmacy level.

In contrast, an “AMP Plus” model would create a very different dynamic for a payer, who would share in the financial benefit from any reduction in Average Manufacturer Price (AMP). Thus, any manufacturer-led distribution changes that reduced competition for manufacturer discounts from direct buyers (wholesalers or pharmacies) would be opposed by payers.

Here in the U.S., payers have shown a willingness to alter drug distribution as a means to reduce costs. (Just look the growth of mail order.) I’m not suggesting that payers will suddenly care about a manufacturer's fee-for-service agreements or the number of authorized distributors. But I am suggesting that AMP will make them care a lot more than they do now.

Current AMP Timeline

I've had a few emails recently regarding the release of the new Medicaid Federal Upper Limit data based on Average Manufacturer Price (AMP).

The most recent official timeline from CMS was issued on October 21 and states the following:

• October 1-31, 2007: First monthly AMP reporting period


• November 30, 2007: Manufacturers report October 2007 AMPs


• December 30, 2007: FULs issued based on new October 2007 AMPs

So unless the NACDS/NCPA lawsuit leads to an injunction and/or S.1951 passes, you'll be watching the new LED Crystal Times Square New Year’s Eve Ball with champagne and AMPs.

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BONUS FUN FACT: You are smarter than a 16th grader!

The Prescription Access Litigation blog recently rated some pharma blogs for readability in Do you have to be a Genius to read this blog? Or an 8th grader? Drug Channels was rated at the "College (post grad)" level. (I have no affiliation with PAL.)

Gee, I try to only use words with clear and unambiguous definitions . . . like Average Wholesale Price. However, I now know why my blog keeps getting beaten up for its lunch money.

Last Ditch Effort for S.1951

Although I wasn’t planning to post again before Thanksgiving, I want to let you know about the joint letter about Average Manufacturer Price (AMP) sent last Friday by eight trade pharmacy and pharmaceutical supply chain trade associations. The text of the letter was made public this morning.

The letter urges U.S. Senators to support S.1951 (Fair Medicaid Drug Payment Act of 2007), which has only 33 co-sponsors right now. Key points in this bill:

• Removes mail order from the retail class of trade, which I identified as one of the most significant decisions in my Comments on AMP Final Rule.
• Raises Medicaid payment to 300% of AMP instead of 250%.
• Prevents publication of AMP data on the CMS website, which means it can’t be used as a reimbursement benchmark.
• Bases pharmacy payment on a weighted average AMP. (I’m unclear about the benefit of this provision because weighting could lead to a lower AMP. In fact, a 2005 OIG study found that an AMP weighted by Medicaid expenditures was lower than the simple average.)
• Applies the AMP formula only when three or more alternatives are available instead of two or more. This change will be especially beneficial for pharmacies, wholesalers, and PBMs during the first 180 days after generic launch.

Click here to read a useful summary that highlights the proposed mark-ups to the bill. The summary is identified as being created by American Pharmacists’ Association (APhA).

A related bill, H.R. 3140: Saving Our Community Pharmacies Act of 2007, is stalled in Congress according to Pharmacy Reimbursement Bill Stalls in Congress. (H.R. 3140 replaces AMP with a survey-based metric called “Retail Acquisition Cost.”) The article cites the so-called pay-go rules, which presumably also apply to S.1951.

“Concerns about the legislation's prospects stem from congressional "mandatory spending" budget rules, which require any spending increases to be offset by program cuts or tax increases. Budget estimates are that $3.5 billion will be needed to reimburse pharmacies fully for their costs of purchasing and distributing generic drugs for Medicaid patients.”

Regardless of the outcome, I must give credit to these associations for pulling out all the stops in support of their members.

Death by AMP

I just discovered an intriguing website that quantifies the final impact of AMP.

Try it yourself.
1. Go to this website.
2. Select "AMP" from the drop down menu.
3. Enter your specific data.
4. Click the button for your personalized results.

It turns out that 183.82 cans will stop me from writing about pharmacy economics anymore. YMMV.

Have a Happy Thanksgiving!