Wednesday, August 17, 2011

Coming Soon: Average Acquisition Costs for Pharmacies

The Average Acquisition Cost (AAC) revolution in pharmacy reimbursement is evolving rapidly. Today, I take a look at three recent developments:
  • The Center for Medicare and Medicaid Services (CMS) recently held a public meeting to describe how it will conduct its survey of pharmacy price and acquisition costs. CMS may publish its first data file by the end of 2011.
  • The Office of Inspector General (OIG) released a survey on how state Medicaid programs are planning to replace First DataBank’s the Average Wholesale Price (AWP) data. Most want to use AAC.
  • California reversed course (again) on AAC in Medi-Cal in its latest budget.
Go bananas and read on for details.

Tomorrow, I’ll discuss the potential impacts of AAC on the pharmacy industry.


As many of you know, First DataBank (FDB) plans to stop publishing AWP data in September, although other companies will continue publishing this benchmark.

The OIG recently released Replacing Average Wholesale Price: Medicaid Drug Payment Policy, a survey report on how state Medicaid plans will deal with the impending extinction of FDB’s AWP data. The survey was conducted in January 2011.

Here’s what they found from the 45 states still using AWP data from First DataBank:
  • 20 states had “not developed any definitive plans” despite getting AWP data from First DataBank. Way to plan ahead, folks!
  • 3 states plan to replace AWP with Actual Acquisition Cost (AAC)
  • 12 states plan to replace AWP with Wholesale Acquisition Cost (WAC), an alternative published list price that has the advantage of being defined legally in the Social Security Act
  • 10 states are sticking with AWP, but are or will use another vendor to get the data
But the big news in the report is that most states would prefer to use AAC data, especially if CMS does the hard work. According to the OIG report:
Most States (44 of 51) would prefer that CMS develop a single national benchmark to set Medicaid reimbursement rates. Twenty-four States specified that they want a benchmark based on pharmacy acquisition costs.
This finding brings us to…


In July, I noted that that CMS is moving ahead with a pharmacy acquisition cost survey. For the newly-released details, get your paws on the August 4, 2011 Stakeholders Meeting Presentation.

The slides explain how Myers and Stauffer will conduct the National Average Drug Acquisition Cost (NADAC). The objectives of the NADAC (per page 7):
  • Determine the national average cost that retail pharmacies pay to acquire drugs (Independent, chain, or specialty)
  • Evaluate geographic, chain and independent, rural and urban cost variations
  • Publish a monthly reference file to assist State Medicaid Pharmacy Programs in evaluating their existing reimbursement methodology
The slides speak for themselves on survey methodology, so I won’t bother rehashing it. Reed Smith has a blow-by-blow summary of the meeting in CMS Discusses Details of New "National Average Drug Acquisition Cost" Survey.


California is once again swinging ahead with its own AAC plans.

I’ve been tracking the AAC debate in California, from the initial proposal (California Medi-Cal Joins the Cost-Plus Revolution) to its rejection (Update: CA Medi-Cal Backs Away from Cost-Plus).

I don’t know what happened beneath the planet of the AACs, but detailed AAC implementation language ended up in California Assembly Bill 201 (AB-102), which was approved by Governor Brown in late June. The relevant regulations are on pages 18 to 24 of the PDF.

In particular, page 20 indicates that California pharmacies will receive ingredient cost reimbursement for both brand and generic drugs at the lowest of:
  • Average Wholesale Price (AWP) minus 17 percent
  • Average Acquisition Cost
  • Federal Upper Limit
  • MAIC (Maximum allowable ingredient cost)
The legislation tosses AWP once AAC is up and running:
(C) Average wholesale price shall not be used to establish the estimated acquisition cost once the department has determined that the average acquisition cost methodology has been fully implemented.

I saw Rise of the Planet of the Apes last weekend. It’s an entertaining and fun night at the movies, although I disliked the (yawn) “evil pharmaceutical executive” stereotype.

I was stunned to find myself as the only person in the theater who laughed (or even reacted) when a character snuck in the iconic line: “Get your hands off me, you damn dirty ape!”

Oh well, just another depressing sign of my age and/or geekiness!


  1. Hi Adam - good update on all the moving parts. The CMS meeting was interesting, and we continue to press the state of California on why they are moving ahead parallel to the Feds on AAC. If all the states do their own version of AAC and the Feds do a national AAC, then we will have 50+ different "average costs".  How is that any better than the current benchmarks?  Actually we know the answer on why CA is moving ahead, and that is they need to score the budget savings in stripping the spread out of the drug cost.

    I also saw the movie over the weekend with my 11-yo son and its was hilarious - totally got that line!  I had to explain it to him. There were a couple other reference gems in the movie, such as the names of the Chimps in the detention facility (Cornelius). LOL!

    Jon Roth, CEO, Cal. Pharmacists Assn.

  2. I guess the real-world question is how much AAC varies across the country. I don't have a fact-based answer to the question. Every state Medicaid program uses a different methodology, which can lead to some bizarre variations. I show an example here: A Victory for Pharmacy Profits in South Carolina

    And yes, there were many fun in-jokes in the movie, especially for those us who came of age in the 70s when the first 5 movies and the TV show were big.

  3. Hi Adam,


    Nice article on the AACs for pharmacies. BTW, I saw Planet
    over the weekend and laughed at the same line as you did.




  4. James CobbAugust 18, 2011

    There is already a published benchmark available to the industry. Pharmacy Acquisition Cost (PAC)