Friday, February 18, 2011

California Medi-Cal Joins the Cost-Plus Revolution

Ladies and gentlemen, the third horseman of the AAC-pocalypse has arrived!

California Governor Gerry Brown just proposed legislation that would shift the pricing benchmark for Medi-Cal pharmacy reimbursement to average acquisition cost (AAC). Fans of transparency will be pleased to know that the AAC data will be deemed non-confidential. Click here to read the proposal (where AAC is confusingly referred to as “average acquisition price.”)

How much longer before the commercial market starts to incorporate these new data into their pharmacy benefit manager (PBM) and pharmacy contracts? How much profit pressure will transparency create for the pharmacy, wholesaler, and PBM industries? And how soon until a certain large pharmacy chain threatens to pull out of Medi-Cal?

FYI, Cost-Plus Pharmacy Reimbursement is one of the major trends that I analyze in The 2010-11 Economic Report on Retail and Specialty Pharmacies. If you haven’t already done so, may I humbly suggest that you make a small investment in your own professional development and download it today?


Medi-Cal is California's Medicaid program. If this legislation passes, California will join Alabama and Oregon as cost-plus innovators in Medicaid. The U.S. Department of Health and Human Services is also behind this effort, as I pointed out two weeks ago in HHS Wants States to Control Medicaid Pharmacy.

Here’s what the proposed California legislation states:
“Average acquisition price” means the price determined by the department to represent the actual average acquisition purchase price paid for a drug product by retail pharmacies in California. The average acquisition price shall not be considered confidential and shall be subject to disclosure pursuant to the California Public Records Act.
The dispensing fee will be increased to $7.25 for a retail pharmacy. Once the AAC data are up and running, the legislation also proposes dumping Average Wholesale Price (AWP), stating:
Average wholesale price shall not be used to establish the estimated acquisition cost once the department has determined that average acquisition price has been fully implemented.
The state’s “Maximum allowable ingredient cost” (MAIC) for generic drugs will be based on the as-yet-unreported federal Average Manufacturer Price (AMP) plus a percent TBD.

Keep in mind that Medi-Cal is massively overpaying for generic drugs. The average pharmacy reimbursement in California for a generic drug in Medicaid is the second highest in the country. See New Study Finds Small AMP Impact, But Trouble in Six States.


The use of an external, government-collected average-cost benchmark is the most straightforward way for a payer to implement cost-plus pharmacy reimbursement.

As it happens, I was in Phoenix this week delivering a keynote address on The Future of Pharmacy at the Pharmacy Benefit Management Institute (PBMI). The audience included 300+ executives from health plans, self-funded employers, and PBMs.

Based on my conversations, the savvier plan sponsors are keeping a close eye on these developments. Up-and-coming PBMs such as Catalyst Rx (NASDAQ:CHSI), SXC (NASDAQ:SXCI), and Restat (private) are banking on a cost-plus, "transparency" revolution.

So, who will be the fourth state to join the Medicaid cost-plus party?


  1. One note: the df is currently $7.25. The bill says they'll consider a one-time increase in the fee IF they find that aggregate reimbursement is lower under the AAAC. So the bill includes no explicit increase.

    Note 2: another Brown budget bill increases copays to $3 and $5 but in a major change makes the copay part of total reimbursement. Currently pharmacies get paid the set rate PLUS copay (many of which are waived). If passed, pharmacies will depend for the full rate on collection of higher copays.

  2. I find this proposal very interesting and I wonder if California's amended State Medicaid Plan will be approved by CMS as proposed. I saw no mention of "Usual & Customary" and no mention of "Cost of Dispensing" studies. Is it possible that those $4 dollar generic prices would increase for Medi-Cal? What happens when the dispensing fee is about half of the cost of dispensing and the ingredients cost is AAC? Who closes their doors to Medi-Cal patients first?

  3. State Medicaid pharmacy reimbursement will be a big battle.

    I just saw the Feb. 16 joint letter from the National Association of Chain Drug Stores (NACDS) and the National Community Pharmacists Association (NCPA) sent to every Governor and State Medicaid Director. Click here to read it.

    They argue for comprehensive cost of dispensing studies and adjustments to state dispensing fees before moving to AAC-based reimbursement.


  4. There are many other components of Gov Brown's budget proposal, including an across the board 10% cut to provider reimbursement. As noted above, the current dispensing fee is $7.25 - which is well below the actual dispensing costs as determined by the state's own (now dated) studies. Without an adjustment to the dispensing fee as occurred in Alabama and Oregon, it seems likely that the SPA needed to implement the shift to AAC will be rejected by CMS. One aspect of Sec. Sebelius' letter that is rarely mentioned is the absence of any mention of provider cuts as a budget balancing strategy - which appears to be what California is seeking to do under the guise of an AAC proposal.

  5. An Acquisition Plus (AqP) pricing model does give the payer, both government and private, more control over pharmacy distribution by allowing a full understanding of the cost of medication. AqP permits easily understood bottom line numbers to be produced.

    The AqP pricing model shows decreases in both the cost per Rx filled and total drug expenditures to the payer instead of convoluted discounts and rebates.

    I think this is actually advantages to retail community pharmacies. PBM and Mail order were and are much adapt of taking of advantage (abusing) of the old AWP discount business model than retail community Rx distribution sites.

    Yes, pharmacies with lower COD and acquisition costs will make more profit and that is as should be.

    The Free Market is already producing this new AqP PBM business model using community retail distribution, which ironically is very similar to the original PBM business model.