Tuesday, June 05, 2012

Government Boldly Launches a Deeply-Flawed Survey of Pharmacy Acquisition Costs

Cost plus reimbursement…the final frontier…

On June 1, CMS officially launched its wagon train to the stars—the National Average Drug Acquisition Cost (NADAC) survey. CMS is now surveying 2,500 pharmacies per month, gathering invoices to compute a public average acquisition cost (AAC) for pharmacy reimbursement.

The plan is unlikely to work. Here’s why:
  • The pharmacy industry doesn’t think CMS has the right to collect these data.
  • Participation is voluntary, so many pharmacies will simply ignore the survey.
  • CMS’ methodology allows the AAC data to be easily inflated, rendering the information useless.
Good luck, CMS. And if you think you have trouble with tribbles, you haven’t seen anything yet.


Last July, I noted that the Center for Medicare and Medicaid Services (CMS) was moving ahead with its National Average Drug Acquisition Cost (NADAC) survey. See CMS Moves Ahead with Pharmacy Acquisition Cost Survey.
Note that the NADAC is different than Part I's National Average Retail Price (NARP), which is explicitly authorized by Congress in section 2503 of the Patient Protection and Affordable Care Act (PPACA). CMS has not yet released a methodology or plan for NARP, so my comments in this article only apply to NADAC.

An acquisition cost reimbursement approach computes a pharmacy’s ingredient cost reimbursement based on data collected directly from pharmacies (as in Alabama’s Medicaid program) or via private direct-to-payer contracts (such as the Caterpillar model). My most comprehensive discussion of various cost-based models can be found in Chapter 5 of the 2011-12 Economic Report on Retail and Specialty Pharmacies.


Pharmacy industry emissaries have consistently opposed the collection and publication of acquisition cost data. See DC Fracas Over CMS Transparency Proposal (from August 2010) for a refresher on the pharmacy industry’s prime directive. ("There can be no interference with pharmacy economics.") NCPA has also stated its belief that CMS lacks the authority for the NADAC. (See this letter.)

CMS prebuts this criticism early in the methodology document, noting:
“Federal regulations require that Medicaid reimburse for drug ingredient costs at no more than the agency’s best estimate of the acquisition cost for a drug.”
Nevertheless, I smell a lawsuit brewing faster than you can say Harcourt Fenton Mudd. Expect a legal photon torpedo whenever CMS starts posting data.


Participation in the AAC survey is voluntary. Here are some excerpts about the survey process:
“The survey will request the voluntary submission of drug acquisition cost data from the previous month. Pharmacies will be asked to submit the requested information within 2 weeks.”
“Pharmacies are requested to submit information on all covered outpatient drug purchases made from all wholesalers or manufacturers over the specified time period. Information requested through the survey consists of a minimum of the following:
  • NDC Unit
  • Price Paid
  • Invoice Date
  • Quantity Purchased”
How many pharmacists will actually “volunteer” this information, knowing it will be used to set a benchmark reimbursement? The CMS methodology document doesn’t mention response rate, but I’ll be stunned if it’s more than 10%.

In its weekly newsletter, NCPA indirectly implies non-compliant civil disobedience, writing:
“The surveys are voluntary. Each pharmacy must determine whether it wants to participate. States will likely use these data when made public as a benchmark for Medicaid pharmacy reimbursement.” (emphasis in original)
Of course, low response rates will only make Average Manufacturer Price (AMP) look better. AMP data (shown most recently in Generic Plavix: Let's Do the Price Limbo) are government-defined and -collected data, which encourages high standards of compliance by the reporting manufacturers. Manufacturers that fail to provide AMP data on a timely basis may be subject to civil money penalties and/or termination from the drug rebate program.


Here’s the fatal flaw:
“For purposes of this survey, discounts or rebates that are not listed on the invoice will not be collected.”
Hmm, really?

Last fall, the Office of Inspector General compared retail pharmacy invoice prices with the AWP and WAC benchmarks for single-source (brand-name) drugs and multi-source generic drugs. Single-source drugs are invoiced at about WAC list price, while multiple-source drugs are invoiced at almost 90% discounts to list-price benchmarks. For details, see Pharmacy Invoices Show Flaws in Drug Pricing Benchmarks.

However, the NADAC data exclude any discounts, rebates, and other price incentives not reflected in the invoice prices. These off-invoice amounts are greatest for multiple-source (generic) drugs, so actual net pharmacy acquisition costs can be much lower than invoice prices.

Think about it this way. This whole effort could be easily undermined if wholesalers raised invoice prices, while simultaneously increasing off-invoice end-of-quarter rebates. Even if actual acquisition costs remain the same, the reported NADAC values would be higher. Such tactics would certainly help pharmacies to live long and prosper.


Am I being too critical of CMS? Or has CMS been spending too much time on the holodeck?

P.S. Believe it or not, multiple people mentioned “more Star Trek” as a way to improve Drug Channels in the 2012 reader survey.  So, this one’s for you!


  1. Thanks for this.     I had the same feeling, but not as entertaining!

  2. Once again, gubment thinks they got it all figured out...I tell ya what, how about we just get a fair reimbursement across ALL products (read:single source generics) then everyone is happy.

  3. Thanks for commenting, Jim. I agree that AAC models can be a positive for pharmacies (per The Pharmacy Industry's Future in an AAC World. However, the government's implementation of AAC may be indicative of broader non-compliance and manipulation problems with survey-based benchmarks.

  4. A Pharmacy OwnerJune 05, 2012

    I got the letter today. O joy! Where does it say that it is voluntary?

  5. The methodology document reproduces the letter on page 30. It states: "Your participation in this endeavor is strongly encouraged and greatly appreciated." Hence, not mandatory.

  6. AnonymousJune 05, 2012

    More Star Trek is right!

  7. If this survey was a member of Starfleet, I think it would be wearing a red shirt...