Tuesday, March 31, 2009

Walgreens to Washington: Make my day

Walgreens is headed for a showdown with Washington State over Medicaid reimbursement rates. Per Walgreens official announcement yesterday:

"As a result of extreme reimbursement cuts in the State of Washington Medicaid program, Walgreens (NYSE:WAG)(NASDAQ:WAG) today announced it will withdraw 44 of its pharmacies from the state's Medicaid program as of May 1."

I expect other pharmacies to follow Walgreens lead, putting Washington state in the unenviable position of having to backtrack and try again. Next time, perhaps the state will focus on generic drugs, the real source of potential savings for public programs.


On April 1, Washington state is planning to reduce the Medicaid pharmacy reimbursement for single source (brand) drugs from Average Wholesale Price (AWP) minus 14% to AWP minus 20%. See the state's official announcement from Feb 26, 2009.

Given the proposed date of enactment, you might be tempted to think that this is an April Fool's joke. AWP minus 20% would put Washington last among the 50 U.S. states for single source drug reimbursement based on CMS' December 2008 list of Medicaid reimbursement rates from around the country.

Granted, Medicaid is more generous than private payers -- see the data in Pharmacy Profits and Wal-Mart. But I'm still puzzled by the economic logic behind the state's move given the pricing dynamics in the pharmacy supply chain. Why attack pharmacy reimbursement for brand-name drugs?

Maybe the Department of Social & Health Services has an anti-Willie Sutton approach -- because brands are not where the money is.


In fact, The real money for pharmacies in Medicaid comes from generic (multiple source) drugs.

High generic pharmacy margins led directly to the Deficit Reduction Act of 2005 and the Average Manufacturer Price (AMP) fight. See the "Our Story So Far" section of my April 2008 article The AMP Saga Goes On and On and On.

The newest data show that Medicaid is still more generous for generics than Medicare Part D plans. A 2009 OIG study found that the average Part D and Medicaid pharmacy reimbursement amounts were similar for selected single-source drugs. However, Medicaid pharmacy reimbursement amounts typically exceeded the average Part D reimbursement amounts for selected multiple-source drugs. (Source: Comparing Pharmacy Reimbursement: Medicare Part D To Medicaid)

Stay tuned for more excitement as the twin demons of "health care reform" and "cost control" collide.


Sesame Street Explains the Bernie Madoff Scandal

OK, this video clip has absolutely nothing to do with the post above, but I think it is hilarious. YMMV.


  1. Penny wise and pound foolish. Another example of knee jerk solutions to serious problems. If the pharmacies follow then the state will get the message. It should never have gone this far. I liken this to the whole healthcare cost scene. Drug costs are decoupled from the rest of healthcare when drug compliance has been clearly linked to LOWER healthcare yet many plans put restrictions and penalties for following a doctor's scripts.

    Sorry for the rant. Loved the muppets but then I always have!

  2. Good for Walgreens! If only the other chains in the State had the sense and nerve to floow through. I wonder if any independents will also follow suit. Unfortunately, I do not thing Rite Aid will go along. They are so badly managed and run, they could never pull off a smart move like this.

  3. It's time that pharmacists stand up for fair reimbursement levels. Washington did something arbitrary without looking at how it will affect pharmacies. I know you have complained about pharmacy margins in the past but I'm glad to see that you got this one right.

  4. Adam,

    Can this quote really be from you?

    "Why attack pharmacy reimbursement for brand-name drugs?"

    Wow! It seems that you're now part of the pro-pharmacy lobby. Maybe putting in too many miles at work. YMMV.

    Seriouly though, America is a great country. And competition drives our engine. Usually this competition is in the form of lower prices, but not always.

    And as many economists say, if WMT and our Gov drive too many providers (PHARMACIES) out of business, then somewhere...somehow costs will creep up. Whether it be directly in pharmacy, or indirectly with another health related issue, we will all feel the impact

    And yes, I do agree with you on most issues.

    Take care...and thx always for your insight!

  5. Another chain in Washington has announced that they will no longer take any new Medicaid patients on. I guess they don't want to absorb Walgreens Medicaid patients! I am dying to see how this will play out. The Department of Social and Health Services assistant sec't Doug Porter had said on March 29th that he did not expect any pharmacies to turn away Medicaid patients. I guess he was dead wrong. This will have huge ramifications throughout the country. If the State of Washington folds, we will see Walgreens and other chains using this very smart, and right tactic played out in other States. I expect to see something like this in California and NY's future.

  6. Traditionally, the thought has always been that higher reimbursement for generic drugs will lead to greater generic utilization--sort of a reward for dispensing generics. Well, maybe WA's idea was to use a punishment for dispensing brand name drugs instead of a reward. Somehow, though, I doubt their thought process was this complex.

  7. Update as of 3/31/09: "A federal judge in Tacoma has temporarily blocked Washington state's plan to reduce Medicaid prescription drug reimbursement rates."

    See Judge blocks state's Medicaid prescription drug plan.