Monday, January 30, 2012

New AMP Rule Targets Bona Fide Service Fees

Late Friday, the Centers for Medicare and Medicaid Services (CMS) finally released its long-overdue proposed rule regarding Average Manufacturer Price (AMP) under the Patient Protection and Affordable Care Act (PPACA). Savor all of the bureaucratese for yourself in the Proposed Rule.

In the proposed rule, CMS doubles-down on its use of AMP in the Medicaid program and lays more groundwork for Actual Acquisition Cost (AAC) reimbursement methodologies. 

Manufacturers should pay close attention to this proposed rule because of its potential impact on trade agreements with wholesalers and pharmacies. CMS is proposing important changes to its interpretation of bona fide service fees, while simultaneously choosing not to clarify key items.

Welcome to the ugly underbelly of healthcare reform!


AMP is currently used in the computation of manufacturers' rebate obligations to state Medicaid programs. Thanks in part to the PPACA, AMP data will soon be used to compute the Federal Upper Limit (FUL)—the federally established maximum amount that a state Medicaid agency can reimburse a pharmacy for dispensing a multiple source drug to a patient covered by Medicaid.

Due to intense pharmacy industry lobbying, AMP was redefined in the PPACA because of its forthcoming role in pharmacy reimbursement. Pharmacy owners are freaking out because generic reimbursement will be curtailed in some states. See The Pharmacy Reimbursement Hit from AMP-Based FULs. Pharmacy industry lobbyists are panicking because their chest-thumping about winning an “AMP fix” turns out to have been unwarranted. See Take this AMP and Shove it.


Although the PPACA passed in March 2010, CMS has been dodging many unresolved questions about AMP. Coincidentally (or perhaps not), Republicans on the Senate Committee on Finance and House Committee on Energy And Commerce sent this tartly-worded letter last Friday to CMS asking for an update on CMS’s plans regarding AMPs and FULs. And whaddya know? The proposed rule magically appeared the very same day!

In Friday's proposed rule, CMS didn't alter many previously-disclosed pharmacy reimbursement elements. But three items caught my eye:

  • On pages 117-122, CMS uses Indiana's state maximum allowable cost (SMAC) list to justify its FUL methodology. Expect lots of controversy over these computations.
  • On page 50, CMS proposes including "entities conducting business as retail community pharmacies or wholesalers, including but not limited to Specialty Pharmacies, Home Infusion Pharmacies and Home Healthcare Providers." This broadens the group beyond "retail community pharmacies."
For more details on AMP, AAC, and the impact on the pharmacy industry, see the 2011-12 Economic Report on Retail and Specialty Pharmacies, especially Chapter 5 and the last two sections of Chapter 8.


Bona fide service fees are very important in trade and channel management. For example, specialty pharmacies are often compensated by pharmaceutical manufacturers with bona fide service fees. Pharmaceutical wholesalers can be compensated with bona fide service fees in distribution service agreements.

Per the PPACA, bona fide service fees are excluded from the computation of AMP. Section 2503 of the Affordable Care Act states:

bona fide service fees paid by manufacturers to wholesalers or retail community pharmacies, including (but not limited to) distribution service fees, inventory management fees, product stocking allowances, and fees associated with administrative services agreements and patient care programs (such as medication compliance programs and patient education programs)
In Friday's proposed rule, CMS adds to this statutory language in two important ways:
  • Retroactive price adjustments, a.k.a. price appreciation credits in channel agreements, will not be considered "bona fide service fees." CMS claims that these amounts do not reflect any service or offset of a bona fide service performed on behalf of the manufacturer. Therefore, CMS wants to include them in the AMP computation, which could decrease AMP.
  • GPO fees (beyond what's listed in the statute) will be considered bona fide service fees and excluded from AMP, which could increase AMP.
At the same time, CMS is declining to clarify important terms such as “fair market value,” stating:
We continue to be concerned that these fees could be used as a vehicle to provide discounts, as opposed to fees at ‘fair market value’ for bona fide services. Thus, to avoid potential fraud concerns, we are retaining our definition, but we have chosen not to define ‘fair market value’ at this time.” (emphasis added)
Gee, thanks. I didn’t find their justification to be very comforting:
Due to the rapidly changing market in which new types of arrangements arise, we believe that manufacturers should appropriately determine fair market value and make reasonable assumptions consistent with adequate documentation that will support their payment for these services at fair market rates sufficient that an outside party can determine the basis for the fair market value determination.
My plain English interpretation?
“CMS hopes that manufacturers can guess what we want. And if a manufacturer guesses wrong, it would be a darn shame...for them.”
Comments on the proposed rule are due by April 2. ‘nuff said.


  1. Dr. Fein,

    Great insights.

    What do you think abou the includion of "specialty pharmacy"? Any guess about how CMS will treat PBM-owned specialty pharmacies since AMP must exclude rebates or discounts provided to PBMs?

    Thank you.

  2. William RothJanuary 30, 2012

    Excellent synopsis Adam.  I agree, the clarification going back to the MMA continues to be in one direction, if the money is being passed on in part or whole and drops to bottom line acquisition cost by a provider, payer or hospital, it is likely to be reflected as the discount that it should be.

  3. Hmmm, good question. I don't know.

    The PPACA excludes "payments received from, and rebates or discounts provided to, pharmacy benefit managers, managed care organizations, health maintenance organizations, insurers, hospitals, clinics, mail order pharmacies, long term care providers, manufacturers, or any other entity that does not conduct business as a wholesaler or a retail community pharmacy." 

    Many of these entities operate specialty pharmacies, so I suppose it will be just turn into a complex data-related compliance issue.

  4. FYI, Chris Cobourn at CIS has a good analysis on his blog: The Proposed AMP Rule: Some Initial Thoughts

  5. In general, on the topic of Specialty Pharmacy, I see this as a significant  shift away from the more restrictive RCP definition that the Retail Industry had been pushing for.

    Prior to PPACA, we generally would have included Specialty as Retail.  When PPACA came out and we had the new RCP definition, we generally took the approach of thinking of RCP as “brick and mortar, serving the general public” and manufacturers generally did not include specialty as retail (but would include discounts to specialty in the Alternative 5i AMP definition)

    I can’t imagine that the retail industry will like the specific inclusion of Specialty in RCP, as it could have a lowering effect on AMP. And it would have an odd effect, as many of the companies with injected types of drugs that go through specialty are also Alt 5i drugs, so these discounts would be in an RCP AMP, which these companies don’t do, and out of the Alt 5i AMP that they do.

    As for the question of PBM owned specialty, on the face of it, I don’t know how CMS could differentiate by type/or ownership of Specialty.  The either meet the definition of RCP or not.

  6. D.W. CollumJanuary 31, 2012

    Mr Fein:  having worked for ABC and McKesson for 26 years, and spent 7 years with generic manufacturers, and with a Masters in Pharmacy Policy and Regulation...and having written prime vendor pharmaceutical contracts with CVS, Raleys, Save Mart, Associated Foods and individual item contracts with Costco, Wal Mart,  and more...I've not seen the term "price appreciation credits" ever.  Is this the same thing as "price protection" on price declines for on-hand or in-transit goods? calling them retro-active price you hint at the so-called annualized volume rebates offered by companies like Teva for hitting a "magic" dollar purchase number?  Sorry but the phrasing is very murky to me.

  7. D. W. CollumJanuary 31, 2012

    Having been around the industry for 30+ years, I've not seen the phrasing,"price appreciation credits" ever before.  Is that the same as "price protection" for on hand goods and in transit goods for price declines? or does that refer to the annual volume driven rebates offered by certain companies? or something else?  Thanks.

  8. "Price appreciation credits" (a.k.a. clawback) are used in some distribution service agreements between brand-name pharmaceutical manufacturers and wholesalers. It limits (or removes) the value of inventory appreciation to the wholesaler. See teh discussion in Chapter 4 of
    2011-12 Economic Report on Pharmaceutical Wholesalers 

    and Specialty Distributors 

  9. Chris CobournFebruary 01, 2012

    Thanks for the Blog Post Adam, I appreciate your perspective
    In general, I read the Proposed Rule and see a pretty significant Financial Impact on the Pharmaceutcial Manufacturers, which is greatly under-estimated by the Financial Impact section of the Proposed Rule, especially if the Final Rule defines what we in industry call a "Build Up" approach, basing AMP on sales that can be clearly defined as Retail Community Pharmacy (RCP).  Standard data for that just doesnet exist, and when/if it did, manufacturers would probably have to purchase it, and would have to overhall their systems.  A lack of standardized data approaches (ie, just telling manufacturers to figure it out) would lead to variances in AMP, and unreliable FULs

    A couple of other troubling things, as far as things that jumped out to me,
    1) I worry about the lack of standards of states developing their AAC
    2) The expansion of Medicaid to Puerto Rico, not only does this have a further financial iimpact on the Manufacturer, it adds complexities to the AMP calculation, as we have to collect and process PR sales and contracting activity, which does not follow the same standards as the US

  10. Adam:  Price recapture (or clawback) is a neutral transaction, whereby the manufacturer just takes back the value of the price increase.  This should not have an impact an AMP - correct?  Although I've never heard the term, "price appreciation credits" seems to imply a manufacturer is providing some credit or discount to offset the clawback.  THAT could be considered a price concession and included in AMP calculations.  Thoughts?

  11. CMS states "retroactive price adjustments, sometimes also known as price appreciation credits." There are multiple types of transactions that could fall into this category. CMS is proposing to count these as discounts, not bona fide service fees, so it would have an impact on AMP.

  12. Regarding "fair market value" of service fee categories mentioned:  Manufacturers will have an impossible task at documenting "fair market value" since every wholesaler and chain warehouse charges different fees for distribution, centralized warehousing, stocking new product, fomulary inclusion, trade show participation (product discounts), pre-inventory buy-in discounts, new DC/store openings, service level / bar code penalty fees, etc.  Note that all of which are generally NOT passed on to their RCP customers.  If Manufacturers turn to 3PL providers for "fair market value" documentation, again, the fees charged for receiving, ambient storage, order fulfillment, invoicing, contract/ chargeback administration, inventory management, etc. all vary significantly. In conclusion, I believe that the documentation requirement of "fair market value" is extremely unrealistic and only the specific supply agreements between the manufacturer and the wholesaler, chain, GPO, or RCP should be required to support "bonafide service fees".  I don't want to see Pharma end up 10 years from now where they've been lately; being sued by States due to CMS' unrealistic grasp of the pharmaceutical industry as a whole.