Thursday, October 20, 2011

Take this AMP and Shove it

Looks like the Average Manufacturer Price (AMP) battle ain’t over yet.

The National Community Pharmacists Association (NCPA) kicked off the latest round with a letter to CMS complaining about the new AMPs and asking for another fix. Here's the press release: Pharmacists to Federal Medicaid Officials: Revamp Proposed Generic Drug Federal Upper Limits to Preserve Pharmacy Access for Patients.

I have some sympathy for pharmacies because the new Federal Upper Limits (FULs) were lower than almost anyone (including me) expected—primarily because generic drugs are even cheaper than anyone believed!

Sigh. It was only a year ago that NCPA and NACDS patted themselves on the back for “reducing what would have been major cuts to pharmacy reimbursement.” I guess healthcare reforms are like the squeaky door to my daughter's bedroom. No matter how many times you try, some things just won’t stay fixed.

Read on for my analysis of the letter.


Here are the main problems that NCPA identifies in its letter along with my comments. As always, I encourage you to read the letter for yourself here.

AMP is not related to Cost of Goods. This is not really true. AMP is a benchmark representing sales by the upstream manufacturer. Add wholesale costs/margins (from a wholesaler or a chain warehouse) and you end up with a pharmacy's acquisition cost of goods.

Regular readers will recall that pharmacy associations are strongly opposed to CMS’ efforts to gather acquisition cost data (as I discuss in CMS Moves Ahead with Pharmacy Acquisition Cost Survey), so where does that leave us?

Many generic drugs are sold at absurdly cheap prices by manufacturers, making list-minus pricing very unreliable. The data from Hello, Transparency: CMS Publishes its First AMP Data show more than two-thirds of the AMPs being sold for less than 25 cents per pill. Many top selling generics sell for pennies per pill.

Purchasing Capabilities of Small Pharmacies. NCPA is on more solid ground here. The letter includes a small table showing that pharmacies will see reimbursement cuts of 38% to 44% under the new FULs. NCPA’s figures are comparable to the independent estimates for ingredient cost reductions that I cite in The Pharmacy Reimbursement Hit from AMP-Based FULs. So much for the “clear, unequivocal victory."

Inconsistency in Manufacturer AMP Calculations. NCPA also has a good point here. Last November (!), CMS withdrew now-obsolete provisions related to AMP and noted that a formal rule-making process will occur at an unspecified future date. See What’s Happening with AMP and Pharmacy Profits!!

Alas, CMS has still not released the new guidance for manufacturers. As Chris Cobourn of CIS has pointed out to me, the draft FULs are based on the interim AMP methodologies, putting manufacturers into a squirrelly-sounding “sub-regulatory environment.” You can read more of Chris’ AMP compliance musings in CMS Publishes its Draft Federal Upper Limit Guidelines Under the PPACA.

Outdated Data. All transaction-related data will have a built-in lag because of the time required for data collection. While NCPA focuses on the negative aspect of rising prices, the reverse could also be true. Pharmacies would benefit when acquisition costs fall more quickly than reported manufacturer selling prices. In other words, AMP could theoretically play the same role in outpatient pharmacy that Average Sales Price (ASP) plays in the buy-and-bill world. Done right, an average price benchmark can guarantee profits for the drug channel. See Profits from Generic Injectables: Too High or Just Right?

Technical issues. NCPA highlights three issues that I classify as technical computation problems: Lack of Smoothing of Data; No Indication that Nationally-Available Products Used; and Inclusion of Non Generics in Calculations. These technical complaints suggest potentially viable lines of attack if the pharmacy associations try to sue CMS and block implementation of the new FULs. Hey, it worked in 2007!


CMS is playing a sly game by forcing pharmacies to fight on multiple fronts: AMP, the acquisition cost survey, and the still-to-come Survey of Retail Prices. CMS threw the AMP data out there without much warning or even a proper commenting process.

Pharmacy lobbyists will probably look for a bigger mark-up by focusing on the PPACA’s “not less than 175 percent” language. I can think of many numbers that are not less than 175%. The easiest sell would be 250% because Congress already included this figure in the Deficit Reduction Act of 2005.

Meanwhile, the pharmacy associations need to take down the "Mission Accomplished" banner, rally their membership (again) to get excited about funding another AMP fight, and of course hire Johnny Paycheck to keynote the next annual meeting.


  1. Aww, Adam, thanks for the nice comments.  Do I hear "Kum ba ya" being sung by you and NCPA?  Nah, didn't think so.  Thanks anyway. 

  2. GerrypurcellOctober 20, 2011

    Adam, when is the pricing survey due?

  3. Just as AMP pricing has played a part in precipating drug shortages and gray market drug speculators, it concerns me that this new CMS pricing strategy might help trigger new drug shortages and gray market speculation.

  4. I expect that we'll see initial data in the first quarter of 2012, but no one really knows for sure.

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  6. RxdisclosureOctober 21, 2011

    Just curious, how is it that someone who has never worked in a pharmacy claims to be an expert on pharmacy pricing, never been a SVP of HR an expert on benefits, never worked in the PBM industry world a spokesman for PBMs? Does not even have an MBA  yet claims to understand business? Good Lord man, you have a PhD in economics and apparently studied at the Paris Hilton school of "famous for being famous". Your obvious bias against independent pharmacists is far more transparent than any PBM plan contract I have seen lately. How is it that someone who has never worked in the industries that you speak about can claim to be an expert? From what I can find, all you do is give flawed and biased analysis of articles and reports that serve only to support your pet theories.

  7. FYI, NACDS weighed in with their own comments. Read their letter to CMS.

  8. Data on AWP Comparisons: retail vs.  Mail… collated and compiled by PCMI (See PCMI twisting reality again)
    Adam, I am not sure how many PBM contract audits you have done, but I am sure you are aware that 82 employers who do not even know what MAC pricing is are not able to supply information to discern a true AWP cost analysis and you are not so naïve as to think that PCMI is any better than any other advocacy group when it comes to number twisting.
    Again, how is it that a supposed fiduciary business like PBMs cans service accounts for the last 30 years and their clients do not even know what a MAC price is. Worse yet, they do not even know if they are using a MAC list. That would be akin to going to an accountant for 30 years and not knowing what an IRS 1040 form is but in the case of the PBM the employer is spending 100 times than they pay the accountant.
    These long time PBM accounts, for the most part, do not understand MAC or AWP; and PBM contract language has gotten to the point that even, I after 17 years of doing this, have to occasionally use an attorney for word interpretation, which is always in the PBMs favor.
     Recently I audited an account who thought he was getting AWP-22 on brand drugs. After taking out one source generics and other high cost generics out of his brand pricing he found out that he was only getting AWP -16.5. Additionally they were moving these same generics out of brands when calculating the generic fill rate to make the GFR look better, which is having you cake and eating to.
    Adam, I have offered many times to do an audit of any PBM account with a mail order piece; mandate or not, and I will do it at no charge.
    It easy to do your meta-analysis work but let us get down and do some real research.
    Jim Fields CFO ApproRx