Tuesday, May 18, 2010

ASP Lessons for Pharmacy’s AMP Future

The Centers for Medicare & Medicaid Services (CMS) recently released the results of a major study on the move to cost-plus reimbursement for Medicare Part B drugs. Here’s the link: Part B Drug Payment Reform: Lower Expenditures without Signs of Adverse Effects

Did the world end once Average Wholesale Price (AWP) reimbursement stopped? Nope. Using claims data associated with more than 45,000 physicians, the wonky researchers from Mathematica found that the switch to cost-plus reimbursement for Part B pharmaceuticals:

  • Slowed the growth of Medicare Part B expenditures
  • Lowered physician payments (and probably income) for certain specialties
  • Reduced beneficiaries’ out-of-pocket liabilities
  • Did not significantly affect the site of drug administration for patients
Pay attention to these lessons if you are interested in the future of the pharmacy industry. I’m hearing the publication of the newly-defined Average Manufacturer Price (AMP) data could occur as early as the fourth quarter of 2010. Expect renewed margin pressure on generic drugs once we have a credible, public transactional benchmark for pharmacy reimbursement.

One more thing. Expect anyone affected by this margin pressure to oppose publication of these data.


Medicare Part B switched to a cost-plus reimbursement method for physician-administered injectable drugs as well as some self-administered drugs such as oral anticancer drugs and immunosuppressive drugs. The reimbursement benchmark—Average Sales Price (ASP)—is published on the CMS site and is increasingly used by commercial payers. See The ASP Future is Here for some background.

After the Medicare payment rate changed from one based on AWP to 106% of ASP in 2005, spending declined by 7.8% compared with 2004 spending. Spending increased only 4.7% in 2006 and 4.5% in 2007 compared with an average annual growth rate of 25% per year from 1997 to 2003.

As Keanu Reeves would say: Whoa.


Today, retail pharmacy margins on generic drugs get compressed via payor-specific maximum allowable cost (MAC) limits. See Won’t get FULed again.

In contrast, average-price models tightly define the window of generic profit opportunity. Providers and drug distributors still profit from brand-to-generic switches in an ASP-based model, but average market prices dictate the pace of profit decline. I walk though a mathematical example in Generic Drug Profits: Too High or Appropriate Incentive?

The publication of AMP data will have a similar effect on retail pharmacy channels. The new AMP definition will have a less pronounced effect because of smoothing and the new retail class-of-trade.

Back in 2006, NACDS and NCPA successfully won an injunction against CMS that prevented CMS from adopting the AMP-based pharmacy reimbursement formula and publishing AMP data. See No AMP for You!

As I understand today's situation, CMS has a legislative mandate to implement AMP without issuing any final regulations (per section 2503 of the Patient Protection and Affordable Care Act).

Will the pharmacy trade association try to prevent AMP from being published without further regulations? Seems likely to me given what's at stake.

P.S. Yes, there really is a drink called AMP Relaunch—the Official Energy Drink of Health Care Reform!


  1. AnonymousMay 18, 2010

    No doubt the posting of AMP data will bring about new calls for injunctions and dispensing fee studies from various stakeholders. I can't wait...

    Adam - any thought to these 'average acquisition cost' pricing programs out there, like the one in Alabama Medicaid?

  2. AnonymousMay 18, 2010

    re: the AMP world, while there could be an initial hit to reimbursement i still don't understand why in the long run we won't see generic inflation in a cost-plus world, and thus longer-term solid profits in generics? if cost-plus on generics spreads beyond just medicaid, nobody will have an incentive to drive AMP down, instead they will want to buy high to get reimbursed more, no?

  3. Interesting idea.

    In general, a pure “cost plus” could have an inflationary effect if cost-plus became a big enough part of the market.

    But using a computed market average as a benchmark is different. Every individual buyer still wants to buy at the lowest individual price and “below average.” The market is too fragmented and competitive for buyers to coordinate to buy at higher prices to boost AMP (a prisoner’s dilemma problems). Since their operating costs are also lower, an AMP that spirals downward will eventually hurt the weaker players and allow the bigger buyers to gain market share. The math example in my earlier post shows how computed average price replaces arbitrary and varying MACs.

    That said, the new AMP is very favorable to pharmacies b/c of computation method (which will include brand and AGs) and smoothing – this will hurt manufacturers, whose rebates are tied to AMP.


  4. AnonymousMay 19, 2010

    The article was in reference to medicare part B, does that mean the largest impact of this would be on medical offices/hospitals? Many hospitals cost shift to the in-house pharmacy, our local hospital charges awp*2.5 for medications dispensed in-house. What will this do?

  5. The study that I cite is based on the switch to ASP (average sales price) as the benchmark for physician reimbursement under Part B and later commercial plans.

    I am making an analogy to the coming publication of AMP, which is sort of like ASP for "community retail pharmacies." AMP will be used in the computation of the Federal Upper Limit (FUL) for Medicaid, but is likely to become a common benchmark for retail reimbursement.


  6. AnonymousMay 19, 2010

    ...and the sky continues to fall in pharmacy.

  7. AnonymousMay 20, 2010

    So, Adam...how do you see the end-game playing out for retail pharmacy? Fewer (or no) independents? Scaling back (reduced hours of operation)of pharmacies at chains? Higher OTC and general mdse prices to subsidize the pharmacy?

  8. AnonymousMay 21, 2010

    Adam, my only issue with this nice analysis: much of the current cost shown here involves drugs that barely existed 10 or even 6 years ago. There is considerably more variation in the Medicare spending rate resulting from the introduction of newer and very high cost Part-B drugs than there is from any change in the payment mechanism.

  9. AnonymousMay 24, 2010

    I would like to here your reply to the previous post (below). What really lies in the future for independents?

    Anonymous said...
    So, Adam...how do you see the end-game playing out for retail pharmacy? Fewer (or no) independents? Scaling back (reduced hours of operation)of pharmacies at chains? Higher OTC and general mdse prices to subsidize the pharmacy?