Tuesday, October 16, 2007

Part D + AMP = Trouble

The Democrat-controlled Committee on Oversight and Government Reform kicked off another round of predictable complaints about Medicare Part D with their report on private Medicare drug plans. Even Ed Silverman at Pharmalot felt the need to join the industry-bashing with his pejorative headline Medicare Part D Is A Costly Mess.

Although it’s a little early for Halloween, I want to give you some scary nightmares about a new monster that could walk among us very soon.

As I see it, the Part D debate and the Average Manufacturer Price (AMP) debate will soon converge. This potent combination would disrupt the retail pharmacy and drug wholesale industry while simultaneously crippling the innovative capacity of the pharmaceutical industry.

AWP Lives!

Page 14 of the new report on private Medicare drug plans provides some interesting data about pharmacy economics under Part D. The 12 Prescription Drug Plans (PDPs) in the Committee’s report reimburse pharmacies using the following formulas and payments:
  • Discount off AWP: 13.5% to 16.5%

  • Dispensing fees: $1.70 to $4.00
The Committee found that the average pharmacy payment from Part D insurers = AWP-15% + $2.10. Thus, a pharmacy would receive a payment (reimbursement) from the PDP of $87.10 for filling a Part D script with an AWP of $100.

NCPA keeps complaining about "low and slow" payments under Part D. I discussed the "slow" myth last month. Seems like they should turn down the rhetoric on "low" payments, too. What do pharmacists want -- AWP + 250%??

As an aside, the report incorrectly states that this amount represents a cost to the Medicare beneficiary. In fact, only beneficiaries in the “donut hole” would pay this amount as an out-of-pocket cost, assuming they had no additional coverage. According to IMS’ Part D report, just 6% of beneficiaries fell into this category. That’s not “typical” (common, average) based on my definition, although the headline to Figure 7 claims to show the “Flow of Payments for a Typical Brand Name Drug.” Whatever.

The Part DAMP Monster

Let’s review a few themes from the past few months of Drug Channels:
  • The AWP system is wounded and can not be repaired. (Sorry to be the bearer of bad news…) The new Part D report trashes AWP in Section D.
  • CMS and the states currently pay for 40 percent of U.S. retail prescription drugs through Medicaid, SCHIP, and Medicare. It'll be 50% within 10 years.
  • CMS is launching a new pricing benchmark called Average Manufacturer Price (AMP).

  • CMS is encouraging states to adopt AMP-based reimbursement methodologies for pharmacies.

  • AMP is widely opposed by everyone in the industry. Therefore, anti-pharma advocates will assume that AMP has merit.
  • The Democrats have been critical of the Part D benefit design, despite its popularity. (Hey, I warned you to watch out in July 2006!)
Now add politics into the mix. If the Democrats take back the White House, then we will have a new CMS Administrator in 2009. We may also have a Democrat-controlled Congress, too.

What if CMS requires Part D PDPs to adopt AMP-based methodologies for pharmacy reimbursement? Or mandates the use of AMP-based Federal Upper Limits (FUL) for both brands and generics in Part D?

The possibilities for mischief are virtually unlimited.


Time for Jeff Kindler to rethink his campaign contribution strategy?


  1. FYI, Ed at Pharmalot updated his post to include the Republican Response.


  2. Hi Adam,

    Just to update and clarify the record, I modified my headline to note that the 'mess,' as I referred to it, should be attributed to the Democratic committee staffers who released the report. I wasn't, on my own, bashing the industry or suggesting the program is a bust. This was a case where the headline was imperfect. Hopefully, it now more closely conveys my original intent.
    Thanks for keeping us on the straight and narrow.

    ed at Pharmalot

  3. with over 1100 stores closing/selling out in 2006, the little independent pharmacy will not survive any more cuts in reimbursement. The pbms are showing record profits and the drug manufacturers are buying the congress ( 3 lobbiest for every member of congress).



  4. As independents are driven out of business, there will be states that will not have enough Mom & Pop Pharmacies to support a wholesaler. Once the wholesaler goes, whatever independents left will be gone too. Here is where it will get interesting. Once there are states with only Chains left, what will the chains be telling the PBM's that they want? After all, a PBM is worthless unless it has participating pharmacies. It will get a lot uglier.

  5. Since the average COGS for a 100 AWP drug is $80 then the pharmacy earns $7.10 before expenses. A national accounting firm calculates expenses to average $10.54 (14% of sales, very good for any industry). I trust you can do the math on the dollar shortfall. In addition, when CMS states that AMP will only decrease reimbursemnt overall by 1%, that 1% drops to the bottom line that only measures a 2% net income now. That 1% in the real world represents a 50% reduction in money earned.

  6. I feel your pain, but please understand that the data are clear: AMP is not the only cause--or only solution--to the challenges of independents.

    First of all, I have written very sympathetically about the plight of independents under AMP (For an example, see Why AMP will not be Independents day

    But let's face it -- there is a whole lot of nonsense being spewed out there about AMP.

    For example, the real reduction in pharmacy revenues from AMP is estimated to by 0.5% in 2008. For the typical independent, that translates into $12,500 less revenue ($2.5M*0.5%), or about $1,000 per month.

    That's not good news and will certainly some belt tightening. It's hardly the difference between bankruptcy and riches.

    Furthermore, the $10 "cost of dispensing" has become a magic number that is repeated uncritically. But as I point out repeatedly on this blog, margin mix is more important than individual product or transaction margins for any retailer or wholesaler. Otherwise, wouldn't CVS/WAG/RAD be out of business by now?

    Look at the margin mix for Medicaid scripts in 2002 in The Attack on Generic Profits in Drug Channels. Most state formulas were AWP-15% back then. (See this page) on the CMS site).

    I'll address business strategies for pharmacies in an upcoming post. In the meantime, I thank you all for your comments and insights into this debate.