Thursday, January 21, 2010

Fixing AMP: A Post-Brown Analysis

AMPs on the ground
AMPs on the ground
Lookin’ like a fool with your AMPs on the ground…

Average Manufacturer Price (AMP) may not be on the ground yet, but it certainly won’t be on the floor of the House or Senate anytime soon. Senator-elect Scott Brown’s surprise win has cast serious doubt on the current health care reform effort.

So, what’s next? I think the pharmacy associations will keep on fighting because they have invested too much political capital on the AMP issue. So, an AMP fix will move forward somehow, with the pharmacy lobby successfully redefining AMP, increasing the mark-up, and perhaps also blocking publication of AMP data.

Nonetheless, marketplace changes and state Medicaid programs actions have made the fix much less important to the pharmacy industry than many people believe, as a just-released OIG study confirms. The latest evidence even suggests that AMP-based FULs are comparable to Part D MAC lists, suggesting overly generous Medicaid reimbursements remain. Facts sure are stubborn things, aren't they?


Both the House and Senate bills included “fixes” to correct (translation: increase) the AMP-based Medicaid Federal Upper Limits (FUL). See Healthcare Reform Options for AMP.

To his credit, President Obama acknowledged reality last night by backing a piecemeal approach: “I would advise that we try to move quickly to coalesce around those elements in the package that people agree on.” FWIW, I think you should read the entire transcript of Obama’s interview with George Stephanopoulos.

So, is adjusting the FUL something that people agree on?

I think so. The NCPA has been pushing the issue incessantly and no one is publicly arguing the other side of the issue (cost control?) except the wonks at CMS. I am impressed by NCPA’s tenacity on this subject and recommend you read their blog post from last week: Getting that Medicaid AMP Fix Right in Health Reform.


A little-noticed GAO analysis released last month added fuel to the fire, but the ultimate impact of AMP-based FULs remains ambiguous based on my reading of the document. Read the GAO analysis and CMS rebuttal.
  • The GAO concluded that AMP-based FULs would have been lower than average retail pharmacy acquisition costs for most of the drugs in their sample and in the national aggregate.

  • However, CMS was sharply critical of the GAO’s methodology, pointing out (correctly, IMHO) that the GAO’s data overestimates acquisition cost by excluding certain discounts and rebates. CMS also highlighted multiple other methodological flaws.
I’m not really sure what’s going on between these two agencies, but the GAO’s results seem highly suspect to me.

By comparison, a more reliable OIG study from August 2009 (with better data) draws much different conclusions:
  • FUL amounts calculated under the current pre-DRA methodology were more than four times higher than average pharmacy acquisition costs and three times higher than Medicare Part D payments. Ka-ching!

  • In the aggregate, AMP-based FUL amounts were only 2 percent below average Part D payment amounts. Keep in mind these amounts are BEFORE the redefinition of AMP contemplated in the current reform bills and EXCLUDE the higher-than-private-payer Medicaid dispensing fees.
I somehow doubt that this just-released OIG study will factor into any lobbying efforts. Only wonks like me will read it, even though the OIG study tells us much more about what's really going on with pharmacy profits.


Over the past few years, I’ve tried in vain to point out the more outrageous claims made about AMP, such as the laughable statement “11,105 pharmacies will close.” (No, not really.)

Yet the world keeps on evolving since the Deficit Reduction Act of 2005.

46 State Medicaid programs now use Maximum Allowable Cost (MAC) lists, up from only 26 States in 1999. Many of these MACs are far below current FULs precisely for the reasons pointed out by the OIG above. (See Exhibit 14 from my pharmacy industry economic report for evidence from Florida.)

The Retail Pharmacy Generic Price War (tm) kicked off by Wal-Mart (NYSE:WMT) is also removing excess generic profit. The OIG study cited above found that the aggregate AMP-based FUL amounts plus a dispensing fee exceeded retail prices available through $4.00 discount generic programs. OIG estimates that Medicaid would have saved $350 million in 2007 if beneficiaries had filled scripts at a pharmacy with a discount generic program. Thank you, Wal-Mart!


But none of these "facts" matter, do they? The NCPA and NACDS can’t back down, having worked their membership into a froth over AMP because “the DRA is a dragon that has yet to be slain” (per Knight in Shining Armor Steve Anderson of NACDS)

So even as the current health care bills careen off the rails, I still expect some sort of AMP fix to emerge from the rubble—whether it is really needed or not.


Confused by the opening of this post? Then you have been living in a non-viral pop culture bubble, my friend!

Google “Pants on the Ground” (39.6 million hits?!?), watch Brett Favre sing, or just ask anyone under the age of 18 to explain what the heck is going on. I was amazed to learn that everyone in my daughter’s seventh grade class already knows the words to this ditty.

Strange days, indeed.


Check out the latest Health Wonk Review hosted by Jaan Sidorov at the Disease Management Care Blog. Great insights into health care reform by bloggers from around the Internet's Tree of Souls.


  1. Hello Adam and a big Ka-ching! back to you.

    But really now, we all know and have a pretty good idea from the many, many cost of dispensing studies that were done about three years ago on what kind of dollar margin is needed in a pharmacy. Sure everything is volume related, but whether it's 8 or 14 bucks, there is always that nut to crack.

    Now what if the PBM's, Medicaid, and other payer sources had a cleaner pay format with a tighter MAC? Yep I said lower and something more realistic...maybe even "transparent". And what if there was something called a margin fee or cost of dispensing fee added to the realistic lower MAC, which would be reflective of what it would cost to fill that Rx? No more fat markups or heavy PBM reimbursements on blind generics, yet a dispensing fee which would put players on an even keel.

    Honestly, would it matter? I say yes.

    It would be more truthful and easier to follow with accurate allowables and dispensing margins. It would allow the industry to educate the benefit coordinators and consumers on what it really costs to fill a Rx.

    Is that so bad?

  2. Hmmm, sounds like you are suggesting that pharmacies and PBMs all give up spreads and move to cost-plus reimbursement.

    But life is full of tradeoffs. There are cons as well as pros to pass-through pricing versus spreads. See my comments in the final section of CAT + WAG = More Momentum for Cost Plus.

    So, how many pharmacy owners are ready to give up spreads, disclose their product acquisition costs, and move to cost-plus reimbursement for all prescriptions?

    Yeah, that's what I thought.


  3. AMPs on the ground, Neil Young style:

  4. quote:"So, how many pharmacy owners are ready to give up spreads, disclose their product acquisition costs, and move to cost-plus reimbursement for all prescriptions?"

    I would in a second, it is the pbm's that would not give it up. Your defense of pbm's is amazing, I just filled a prescription where I got 15.00 over cost and the pbm made 120.00 in spread. On most generics the pbm makes more in spread than the pharmacy that actually fills the prescription makes.

  5. Amp won't make a diffirence! What a week I am having, first the NY Jets, and now Scott Brown!! Life is good!

  6. Adam,

    Your opening made me laugh.

    The ending made me cry.

    Thanks for the info.


  7. Wait Adam, not so fast.
    I surely would in a second convert to a fully transparent program, as long as my costs are covered and a reasonable dispensing fee is paid. Again, need a unique and annual cost of dispensing survey completed for each pharmacy.

    Unsure who is to determine what "reasonable" actually is, but this type of system is clearly headed our way.

    And shockingly, our Medicaid in our great State (hello Ben Nelson), system actually used this type of program to reimburse pharmacies back in the late 70's through the mid 80's. There was an annual pricing survey done by the state which then determined what our dispensing fee should be based upon the price.

    I guess life is one big circle.

  8. Adam,
    I would give it up in a second and I am, actually. I am competing against CAT and Walgreens etc by implenting a cost plus program and cutting out the PBM's with employers in a "unique" clinic model. Everytime they ask me about a formulary I keep telling them, "you can buy whatever you want- here is the price" they pay me the same fee whether is tylenol or zyprexa. AND every other "whim" that the customer wants "delivery, electronic devices, EMR support etc" is paid by them. So no more giving away for "free" services that would need to be covered out of Margin. And guess what.. their costs are lower.. and mine are covered.

  9. Interesting reactions from pharmacy owners regarding a move away from spreads to cost-plus arrangements. If you read my pharmacy report, you know that I see greater use of these programs.

    Cost-plus reimbursement models give a payer better control over pharmacy distribution and dispensing expenses. But they may also reduce incentives for generic substitution by limiting the profitability of generic prescriptions.

    The commenters above probably won't like my view that adoption of cost-plus models will lead to much faster industry consolidation.

    Thanks as always for your thoughtful participation in the discussion.