Tuesday, July 13, 2010

A Victory for Pharmacy Profits in South Carolina

Last month, I read a curious press release from NACDS titled Major Victory for Patients and Pharmacy in South Carolina. It describes the "monumental achievement" of switching the pharmacy's ingredient cost reimbursement in the state's Medicaid program from Average Wholesale Price (AWP) minus 10% to Wholesale Acquisition Cost (WAC) plus 12.5%

Don't be fooled. This really is nothing more than a victory of politics over economics. Moving to WAC+12.5% means that South Carolina’s Medicaid program will now pay far more than other states for its drugs even though pharmacy costs are no higher.

Anyone concerned about the cost of health care should be very anxious about this “victory.” I conservatively estimate that this change will cost the South Carolina Medicaid program almost $10 million per year. Expand this victory to the other 49 states and we’ll add half a billion dollars to Medicaid costs even as states feel tapped out.

Better keep your hand on your wallet. The Patient Protection and Affordable Care Act will increase Medicaid enrollment by 30%. (See Health Reform: Impact on Drug Channels.)

While health care reform may not have bent the cost curve, we certainly seem to be on the road to unbending the pharmacy profit curve.


Perhaps you think I am being overly harsh. Well, an ounce of data is worth a pound of opinions.

The chart below shows a retail pharmacy’s total reimbursement for dispensing a brand-name drug to a Medicaid beneficiary. (I assume an AWP of $170 and a 1.20 WAC-to-AWP markup.) I computed these figures using CMS’ Medicaid Prescription Reimbursement Information by State - Quarter Ending March 2010.

Under the new formula, South Carolina pharmacies will now get an extra six bucks for a typical Medicaid prescription—more than any neighboring state. Does anyone know why a South Carolina pharmacy needs to earn $18 more per script than a Florida pharmacy?

If we make some conservative assumptions about pharmacy acquisition costs, then this seemingly small change in reimbursement translates into a big jump in gross profits per script. On average, a South Caroline pharmacy will earn about $26 in gross profits for each Medicaid prescription—a 30% boost in gross profits despite no offsetting increase in dispensing costs.


I get it. The change in the benchmark mathematically removes the effect of the AWP rollback because [WAC+12.5%] = [(WAC*1.25)-10%].

But I have trouble figuring out why exactly South Carolina pharmacies deserve so much more than everyone else. Here are three plausible but invalid explanations:

More independents? Nope. According to The 2009-10 NACDS Chain Pharmacy Profile (page 13), independent pharmacies are 30% of the pharmacy outlets in South Carolina—the same percentage as the national average.

Higher Cost of Dispensing? Wrong again. According to a Cost of Dispensing (COD) Study (page 30-31) funded by NCPA and NACDS, the average “Medicaid COD per Prescription” for South Carolina was $9.40. For comparison, the national average was $10.51 per prescription and the average of the eight neighboring states was $9.68 per prescription. See the table below.

Higher Pharmacist Salaries? Strike three! According to The U.S. Bureau of Labor Statistics, average annual pharmacist salaries in South Carolina were a healthy in $108,030 in 2009. (Sweet.) South Carolina salaries are on par with neighboring states and slightly above the national average salary of $106,630. See the table below.


While there is no logical cost-based explanation for the extra cash, there is a perfectly plausible explanation drawn from the political decision-making process.

Consider the following extract from the Wikipedia entry on Public Choice theory:
“[T]here may be many advocacy groups that have strong incentives for lobbying the government to implement specific inefficient policies that would benefit them at the expense of the general public ... The costs of such inefficient policy are dispersed over all citizens, and therefore unnoticeable to each individual. On the other hand, the benefits are shared by a small special-interest group with a strong incentive to perpetuate the policy by further lobbying.”
‘nuff said.


For more on South Carolina’s dubious political history, see What's Going On In South Carolina? from always amusing The Onion.


  1. AnonymousJuly 13, 2010

    Key phrase in press release: "...pending approval by the Centers for Medicare and Medicaid Services...." It will be interesting to see whether or not CMS approves the plan. Did CMS ever approve New Jersey's or Kentucky's similar plans?

  2. Good point re:CMS. But I'm still amazed that the increase was signed into law in South Carolina.


  3. AnonymousJuly 13, 2010

    Have you tried your calculations on a low cost generic medication. I don't think the calculations are as robust. You are able to justify anything a manufacturer does for profits and even hide how they make profits, but you can bash the independent all you want. I'm sorry pharmacists make so much. Did I do that, no. The chains did that with their stores on every corner.
    I would be glad to either work with a dollar amount or a percentage mark-up for my prescriptions, but don't bash us when there are times when one or the other is askew.
    Retail pharmacy is the only profession that is regulated on how much we can make, yet we help the nation so much in their healthcare needs. There was a time when pharmacy and doctors made 50% to 80% on a prescription or their office visits. We could then help someone with a house charge and we probably knew we would not get repaid. I can't afford that any longer. A profit of as little as 10% to 25% does not give us the ability to help people. All you seem to see is how little we provide.
    Please remove me from this blog.

  4. Interesting post as always, Adam. Doubt many pharmacists will like it, but you make a good case.

    Any thoughts on the future of reimbursement with the overall Medicaid situation? I don't understand how everything can be funded.

    From http://online.wsj.com/article/SB10001424052748704799604575357540945483582.html?mod=dist_smartbrief

    Several states are preparing to make deep cuts to Medicaid as a federal stalemate over funding for the poor drags on—even as states face mandates to expand the program under the new health-care law.

    Frustration is mounting with Congress's failure to pass an extension of additional Medicaid funding to plug holes in state budgets. With the antispending mood building in Washington, governors say they are increasingly skeptical that such an extension, needed to prop up the program starting next year, will come.

    That has states laying plans to cut hundreds of thousands of Medicaid enrollees and pare services such as dental care, organ transplants, insulin pumps and over-the-counter medications in the coming months.

  5. AnonymousJuly 13, 2010

    Scorching (but true) post today...!

  6. David Schwed RPh FACA FAPhAJuly 13, 2010

    Why not address the issue of a fair compensation model for all parties? Remember Alabama and their unique pricing methodology which much more accurately correlates to AAC? It was just recently submitted to CMS and we should all anxiously await the result. With their rigorous validation process, AAC may indeed serve as a viable model moving forward. However, Alabama fairly applied the same rigor to a COD study to ascertain what professional fee would preserve access for their Medicaid population. This state-sponsored COD study not only verified the results of the above-mentioned industry-sponsored study, but defensibly establishes a dispensing fee above the Grant Thornton Medicaid per Rx Mean COD, even after a CPI adjustment is applied. Cost-to-dispense plus AAC… they just might have something there. Heretofore the water balloon model, where virtually no one pays the true cost of production has played havoc with the budgets of payers and providers alike. The AAC model just might make it fair for all concerned.
    July 1, NJ implemented a draconian budget that more than took back the AWP adjustment, for the second time. To clear the record, we made NJ Medicaid fully aware of the AWP lawsuit and its probable consequences during those years. With our cooperative input, Medicaid increased the AWP discount gradually by a cumulative 3.5%, effectively capturing all of the anticipated savings. The new formula now establishes NJ as the lowest payer in the nation. I contend that the new formula is unsustainable: New AWP -17.5% with a $3.73 fee, or restated at WAC...WAC -1% + 3.73 (with many smaller pharmacies buying at WAC -1%) effectively imposing an AAC model, but without regard to the COD. An observation using your model: $170 AWP = $141.67 WAC = $140.25 WAC -1% + $3.73 = 143.98. With a Grant Thornton Medicaid Mean per Rx CPI adjusted = $12.45, a $143.98 reimbursement represents a $8.72 loss per RX for the pharmacy. Adam, in your opinion is that a sustainable model? By the way, we had proposed the AAC model to NJ Medicaid seven years ago, and we were collectively working toward that model when the sky fell on us. One last note: Pre-July 1, at least in my practice, the average of all NJ Medicaid, FFS and Managed Care alike, was within pennies of AAC plus COD, it just needed to be restated. CMS take note.

  7. Dr. Fein,
    I read your July 13, 2010 post, A Victory for Pharmacy Profits in South Carolina, as well as David Schwed’s comment (to which I await, with bated breath, your response). I would like to offer a little more information regarding Alabama’s modification plan for pharmacy reimbursement- please visit the Agency's AAC website at the link:


    I hope you find the information helpful and forthcoming as we collectively begin the journey to a post-AWP world.

  8. Respectfully, you seem to be viewing this issue incorrectly. The AWP situation never should have been about reducing payments to pharmacies. First DataBank and Medi-Span only reduced calculations of AWPs; they did not reduce the prices pharmacies pay for drugs. Therefore, the AWP reductions reduced Medicaid reimbursement to pharmacies by about 4 percent unless state Medicaid programs took action to account for the revisions to AWP either before or after the effective date of September 26, 2009. Without action, pharmacy reimbursement would be 4 percent below the amounts that states have assured the federal government were their “best estimates” of pharmacies’ “actual acquisition costs”. In South Carolina, pharmacy worked to re-instate reimbursement to levels to those prior to September 26 , 2009, and to move from AWP to WAC in preparation for the voluntary action by First DataBank/Medi-Span to stop publishing AWPs around September 2011. It is also important to note that when the legislature made its decision, it was prior to the announcement by Medi-Span that it would continue to publish AWPs. Therefore, at the time of the decision by the legislature, it was not clear what sources of AWP would have been available in the near future.

    In addition, you mention the cost of dispensing in South Carolina, but you fail to mention that Medicaid pays dispensing fees that are well below those costs. The fact that other states may pay even less does not justify paying pharmacies below their costs in South Carolina.

  9. AnonymousJuly 19, 2010


    What is your point? Just another attempt by you to stir things up and make an issue that your nose shouldn't be in. By the way Adam how much do you charge for your "services"?

  10. My point? As Supreme Court Justice Louis Brandeis once said: Sunshine is the best disinfectant.

    I charge professional fees for my services. You can contact me directly to discuss a project.

    And if you send me your name and address, I would be pleased to refund to you the entire cost of your subscription to Drug Channels.


  11. AnonymousJuly 20, 2010

    Ah yes "Sunshine is the best disinfectant"! You should not take it personally Adam. But this blog is nothing more than your attempt to create controversy. Controversy sells doesn't it Adam.
    You still haven't answered the question- "What is your point. Also, What makes you think I would pay
    to subscribe to your Drug Channels, when you give it away free of charge.

  12. I see you have answered a troll but yet to answer the legitimate points brought up by NACDS and Dr. Schwed. Will we be seeing a proper response to the issues brought up by them?

  13. I responded to both NACDS and Dr. Schwed in the followup post and its comments. See Alabama: More Momentum for Cost-Plus, which appeared two days after the post above.