Friday, September 23, 2011

Hello, Transparency: CMS Publishes its First AMP Data

With little fanfare, the Center for Medicare and Medicaid Services (CMS) snuck out the first draft of monthly Average Manufacturer Price (AMP) data and the new Federal Upper Limits (FULs). See Draft Affordable Care Act Federal Upper Limits.

Whoa. In an easily-downloaded spreadsheet, you can now see average manufacturer selling prices for 719 multi-source generic drugs. More groups are on the way.

One fun fact: generic drugs are pretty cheap. About one-quarter of the AMPs are less than 5 cents per unit (pill, capsule, etc.). More than two-thirds of the AMPs are less than 25 cents per unit. The full distribution of AMPs is shown below.

And for one commonly prescribed drug, the new FULs are lower than expected and below average acquisition cost (at least in Alabama). Uh oh.

The future is here, everyone. CMS is providing a readily-available benchmark for cost-plus retail pharmacy reimbursement, just as Average Sales Price (ASP) became the standard for outpatient injectables. Pressure on channel profits from generic drugs will rise, posing risks to the entire channel—pharmacies, pharmacy benefit managers (PBMs), and wholesalers. Check out my computation of drug wholesaler margin for a hint of what's ahead.


I hope you weren’t expecting some warning that these data were imminent. As CMS tartly reminds us:
Further, we note that section 2503(d) of the Affordable Care Act specifies that the FULs amendments “shall take effect … without regard to whether or not final regulations to carry out such amendments have been promulgated by such date.”
CMS provides a summary on the methodology, but its wonkiness is not for the faint-of-heart. Here's the link, if you dare: Draft Affordable Care Act Federal Upper Limit (FUL) Methodology and Data Elements Guide to the Draft FUL Files

Three things to keep in mind about these data:
  • Retail Community Pharmacy is now defined to be: “an independent pharmacy, a chain pharmacy, a supermarket pharmacy, or a mass merchandiser pharmacy that is licensed as a pharmacy by the State and that dispenses medications to the general public at retail prices. Such term does not include a pharmacy that dispenses prescription medications to patients primarily through the mail, nursing home pharmacies, long-term care facility pharmacies, hospital pharmacies, clinics, charitable or not-for-profit pharmacies, government pharmacies, or pharmacy benefit managers.”
  • CMS is only publishing the weighted average data by product group, although you can view a list of the specific 9-digit National Drug Code (NDC) level included in each group.
The redefinition and exclusions mean that the computed AMP primarily reflects the multi-manufacturer average purchase prices by the big three wholesalers—AmerisourceBergen (NYSE:ABC), Cardinal Health (NYSE:CAH), and McKesson (NYSE:MCK)—and the large self-warehousing retail chains. The definitions exclude certain pharmacy formats such as mail-order pharmacies that purchase generic drugs at very low prices.


File #1 is the summary of the 719 (out of 1,804) product groups with a published AMP. File #2 has the “extreme detail,” so drink a Mountain Dew Code Red while looking at it.

Let’s consider simvastatin, the second-most prescribed drug in the U.S. last year. There are 5 simvastatin product groups, corresponding to 5 different strengths (5mg, 10mg, 20mg, 80mg, 40mg). The draft data only include the 5mg strength. The “extreme detail” identifies 22 unique NDCs of simvastatin 5mg tablets. These 22 NDCs represent different package sizes sold by 11 labelers, one of which is the original patent holder (Merck).

The weighted monthly AMP for July 2011 was a whopping $0.015730. Yup, that’s less than 2 cents per pill. The Federal Upper Limit (FUL) is $0.02753, which is AMP X 175%.

The low AMP for simvastatin is not an aberration. The table below shows the distribution of AMPs for the whole sample of 719 product groups. More than half are less than 15 cents per unit. These prices should also give you some new perspective on why discount generic programs, such as Walmart’s $4 program, are not necessarily a “bait-and-switch loss leader," as some have claimed.

Contrary to expectations, the new FUL may be lower than the Maximum Allowable Cost (MAC) rate in state Medicaid programs. Here are three example MACs:
The projections in New Study Finds Small AMP Impact, But Trouble in Six States now look too optimistic. And perhaps the trade association triumphalism about the "AMP victory” was a bit premature?


I have written extensively about the implications of payer transparency to the hidden economics of generic drugs, most recently in The Pharmacy Industry's Future in an AAC World and more extensively in my 2010-11 pharmacy economic report.

So, ponder a few things that could happen with these data:
  • A savvy plan sponsor or benefit consulting firm can use these data to estimate the size of PBM spreads on generic drugs from mail-order pharmacies, which are more than half of a PBM’s profits per prescription.
  • Pharmacy buyers can take a fresh look at their wholesaler’s generic pricing. As a rough example, the AAC of simvastatin 5 mg in Alabama was $0.03177 (as of July 13), implying average wholesaler gross margins of 50.5%!
Ch-ch-ch-ch-Changes. Turn and face the strain.


  1. Good morning Adam.

    As an economist and math whiz, can you share with us how many Rx's a pharmacist must fill at an to break even? 

    Assume the following parameters:

    1. GFR of 75%.
    2. 50% of generics at 4 bucks.
    3. State regulation in place of 20Rx's/RP/hr
    4. Salary of 100,000 to pay RP (which is actually 20 pct below mkt).
    5. Tech/cashier X 2 @ $10/hr x 40 hrs each
    6. Benefits/ins
    7. Standard overhead costs tied to the Rx dept.

    Above example can be tied to chain or independent as we're solely looking to isolate the Rx dept. Please use your stats for average dollar margin per Rx on both transparent branded and AMP generic side....don't forget to factor in those 4 buck generics.

    Looks like those pharmacists must be living pretty big. 
    Thanks for the accurate education!

  2. You sound bitter. Don't shoot the messenger. I'm just providing the info. I didn't create FULs and don't compute AMPs.

    Perhaps you should look into building a niche in long-term care or with specialty drugs. See my comments in
    .Post-Armada Reflections on the Specialty Market

  3. The 'MACing of America' has begun. It just seems that there is potential for all generic drug groups to have a published AMP sooner than later. For pharmacies cost containment and efficiencies are more important now than ever before. Years back many felt the looming real estate bust but refused to believe it until it was too late and this seems to be happening to the pharmaceutical industry today. Mail order/PBMs may suffer but they will be around regardless. It is the community pharmacy that has to try to get $11 per prescription to exist. Someone said it best: "Change, get big or get out".

    Shawn Patel  TRxADE