Tuesday, February 18, 2014

How Medicaid is Squeezing Specialty Pharmacy Profits

An Avalere Health report—Tracking Gaps in State Specialty Pharmacy Reimbursement—highlights an interesting question: Do new state Medicaid acquisition-cost pharmacy reimbursement models adequately compensate specialty pharmacies?

The problem is easy to describe. State Medicaid programs are rapidly adopting acquisition cost methodologies for pharmacy reimbursement. These new models reduce or eliminate pharmacies’ spread profits. Higher Medicaid dispensing fees are benchmarked to retail pharmacies and don’t account for additional services provided for specialty drugs.

This situation, however, is hard to fix. Unless it is corrected soon, patients will be the big losers. Avalere implies that states will step up with higher fees. Instead, I suspect that manufacturers will be expected to pick up the tab as specialty pharmacies' spreads gets squeezed.


A pharmacy typically earns the majority of its gross profits from spreads between third-party ingredient reimbursement and net acquisition costs. For specialty drugs, these spreads are about 5% to 10%, or $150 to $300 for a $3,000 brand-name specialty prescription.

As we discuss in Chapter 5 of the 2013–14 Economic Report on Retail, Mail, and Specialty Pharmacies, state Medicaid programs are rapidly adopting average acquisition cost (AAC) methodologies. Six state Medicaid programs—Alabama, Colorado, Idaho, Iowa, Louisiana, and Oregon—rely on AAC data for pharmacy reimbursement. New York state recently launched its own AAC program.

The introduction of cost-based reimbursement models can benefit retail pharmacies. Spreads vanish (or shrink sharply) when ingredient cost reimbursement approximates actual drug acquisition costs. Compensation for prescription dispensing shifts from a spread-based model to a service-based model.

Consequently, state Medicaid programs have increased per-prescription dispensing fees to $9 to $15. Some states using AAC-based reimbursement use tiered dispensing fees based on a pharmacy’s annual prescription volume or other factors.


Alas, even the higher dispensing fees won’t replace the substantial specialty pharmacy spreads. As the Avalere report rightly notes: “[E]ven states that have implemented an AAC-based reimbursement methodology have not differentiated dispensing fees for specialty/non-specialty drugs or for retail pharmacy/specialty pharmacy.”

Specialty drugs in open distribution routinely show up in pharmacy acquisition cost surveys. Examples include such drugs as Avonex, Humira, Enbrel, and Neupogen. Based on the most recent data releases, all four drugs show up in the National Average Drug Acquisition Cost (NADAC) data file and the Alabama Medicaid Agency’s AAC list.

Note that the NADAC data are based on 500 to 600 monthly surveys of retail community pharmacies. Specialty pharmacies are excluded from the NADAC surveys.

Here’s another complication: State boards of pharmacy lack distinct regulatory requirements that define a “specialty pharmacy.” As I note in The Explosion in Accredited Specialty Pharmacies, any pharmacy can designate itself a “specialty pharmacy” if its business focus is self-administered specialty pharmaceuticals covered under a patient’s pharmacy insurance benefit.

Nonetheless, 66% of Medicaid programs claim to mandate the use of specialty pharmacies for the dispensing of self-administered specialty drugs. (See EMD Serono Survey, 9th edition, page 52.)


So, who will bear the burden of these reduced reimbursements?

Unfortunately, patients will suffer the most. In addition to basic product dispensing, patients taking specialty medications require services beyond those for traditional drugs. Specialty pharmacies will be caught between declining profit spreads and the patient care costs of higher services. Business survival will translate into reduced services for Medicaid patients.

The Avalere report focuses on blood plasma products, presumably because the report was funded by Grifols (a leading manufacturer of blood plasma products). Perhaps that’s why Avalere optimistically writes: “State Medicaid programs may also consider establishing a separate dispensing fee that appropriately accounts for the services associated with the delivery of specialty drugs.”

As I see it, it’s more likely that manufacturers will be expected (or compelled?) to pick up the tab for those Medicaid patient services, via higher fees for specialty pharmacies. Caveat venditor.


  1. As long as you are not dealing with limited distribution drugs, perhaps some concessions will have to be made for more Medicaid specialty at retail. Retail pharmacists have for quite a while been touting the benefits of face to face pharmaceutical care. In this case it might get put to the test?

  2. Acquisition based reimbursement removes the incentive for retail pharmacies to fight to fill these products. Currently, the high dollar profit margin on a specialty drug is desirable to fill compared to the profit derived from a $4 generic, even if it only cost the store pennies to acquire. Post-AAC, both claims will give the store the same $8, and might not adequately cover that store's cost.