Washington Report: Medicaid Sets the Pace for Pharma Pricing

Forget Medicare price negotiations. Pending changes in Medicaid drug-pricing formulas will put even more pressure on pharmaceutical prices.
Apr 01, 2007


Jill Wechsler
All the hoopla about Medicare drug prices is overshadowing the real action in pharmaceutical pricing: a less-noticed exercise that aims to reduce reimbursement for medicines purchased by state Medicaid programs. Retail pharmacists say the proposed changes will put them out of business, and pharmacy benefit managers (PBMs) fear an end to discount negotiations.

For pharma marketers, the new rules could alter price negotiations and sales to customers. Industry would gain from more consistent and predictable reporting requirements and lower Medicaid rebates. Over the long run, though, more transparent information on prices and rebates will prompt Medicare plans and private payers to demand the same low prices as Medicaid.


Duals create policy duel
Fraud and liability are added concerns. Federal officials say that clearer regulations will halt the pharma-pricing and-payment schemes that have plagued Medicaid and other government programs and cost taxpayers billions. Federal prosecutors have sued marketers for inflating best prices to reduce rebates, for "marketing the spread" between high Medicaid reimbursement and lower actual prices, and for using off-label drug promotion to expand Medicaid and Medicare purchases. The new rules require pharma executives to certify that reported data are accurate and complete, and could cause companies to face stiff penalties, even for unintentional errors.

Amending AMPs

To fix reporting and payment problems, the Centers for Medicare and Medicaid Services (CMS) is finalizing regulations (due July 1) to implement the Medicaid reform provisions of the Deficit Reduction Act of 2005 (DRA). New policies for calculating Average Manufacturer's Price (AMP), limits on state reimbursement for multisource drugs, and other changes are projected to save Medicaid more than $8 billion over five years.


Raising rebates
The new rules would reduce AMPs by expanding the list of customer discounts included in the calculation. Congress established AMPs in the early 1990s as a benchmark for setting Medicaid rebates from drug manufacturers that more accurately reflected discounts offered large purchasers. Rebates are based on AMP minus 15 percent or the difference between AMP and "best price"—the lowest price a brand-name manufacturer collects from any customer, with exceptions for sales to public health programs, such as the Veterans Administration. The Congressional Budget Office (CBO) estimates that AMPs run about 20 percent below Average Wholesale Prices (AWPs) for leading drugs.

AMPs exclude discounts to federal health programs and certain other customers. Now CMS proposes that AMP calculations specifically include discounts to Medicare Part D plans, PBMs, mail-order pharmacies, state pharmacy-assistance plans, and several other entities. PBMs are up in arms because manufacturers would have little incentive to grant them discounts if it means reducing prices for everyone. And while the change in AMP calculation could reduce manufacturer rebates, lower AMPs also could cut reimbursement for injectibles and other drugs covered by Medicare Part B.

In addition to PBM objections, pharmacies oppose the AMP revision because it would cut their reimbursement. The tension between pharmacists and manufacturers makes increased reliance on AMP as the basis for drug reimbursement "a very sticky situation" for CMS, comments Lauren Barnes of Avalere Health.

Improving Best Price

In its quest for clarity, CMS also spells out the specifics for calculating Medicaid best price in its new rule. Best price has long excluded discounts offered federal health programs and nominal or free goods, but it has included prices to most customers, including wholesalers, retailers, PBMs, hospitals, and HMOs. Now CMS specifies an exemption for Part D and state drug plans so that they, too, can benefit from low prices.