Roundtable: Deficit Reduction Act

Nov 01, 2006
By Pharmaceutical Executive Editors

Last year it was the Medicare Modernization Act. This year, a rash of state-level laws aimed at limiting pharma marketing. And next year? As things stand today, the most disruptive, confusing, and impossible-to-comply-with regulations will be the ones springing from the Deficit Reduction Act (DRA) of 2005, signed into law by President Bush this past February. Framed as a way to squeeze costs out of Medicaid, the law promises instead to bring a new level of transparency to pharma pricing by requiring monthly reports, and publication, of a newly redefined Average Manufacturers Price (AMP), which will be used by Medicaid to calculate both rebates paid by pharma companies and reimbursements paid by the government.

It's an ambitious undertaking—all the more so since the Centers for Medicare and Medicaid Services (CMS), in the 16 years since Medicaid came into existence, has been unwilling or unable to define AMP. And the new law gives reason for worry. It removes the prompt-pay discounts granted to wholesalers from the calculation of net price—though there is no word yet on just what CMS thinks is or isn't a wholesaler. It requires monthly reports to be filed within two months—though for most companies, the data for the report are not available for five or six months. It requires originator companies that have authorized generics to calculate their AMP using data from the generics partner that legally they should have no access to. And, of course, it creates a new array of legal threats for pharma companies that don't live up to the Office of the Inspector General's (OIG) expectations in complying.

The first round of DRA changes go into effect in January 2007, and a guidance from CMS is due in July. That means forward-looking companies are already analyzing their data systems and thinking about business processes for complying with DRA. To understand what they're thinking, we conducted a roundtable discussion with industry experts, consultants, and others. What follows is an edited transcript of the conversation.


PATRICK CLINTON (EDITOR, PHARMACEUTICAL EXECUTIVE): What is the government hoping to accomplish through the Deficit Reduction Act?

Christopher Zant Accenture
MICHAEL HEPBURN (CONTROLLER, GOVERNMENT CONTRACT COMPLIANCE, ORTHO-MCNEIL JANSSEN): Deficit reduction. They're looking at healthcare costs in general and trying to find ways to reduce the budget, and trying to find where you get that money. You have manufacturers, you have the government, you have consumers themselves. And then you have the input of interest groups like manufacturers, national retailers, pharmacies. The struggle we're starting to see is around trying to craft a policy that satisfies everyone and which can actually be implemented.

CHRISTOPHER ZANT (PARTNER, ACCENTURE): I think another big piece of it is the perception of taking action. Healthcare is politically charged. It's important to the political process to take steps that appear to control cost, or change utilization of products, or manage how the industry behaves.

BILL SHRIGLEY (GOVERNMENT COMPLIANCE SPECIALIST, ENVISION): One goal is to steer us away from using Average Wholesale Price as a basis for reimbursement. There's been so much criticism and so many problems with AWP—yet it is still widely used by the state Medicaid agencies.

HEPBURN: The government is trying to use that single number for both reimbursement and rebates, when it was originally designed only as a rebate mechanism. And that's not an easy thing to do. Historically, the Medicaid rebate was based on AMP—average manufacturer's price—and best price. Reimbursement was tied to AWP. I think everybody agrees AWP was inflated. Now they're trying to find a reimbursement mechanism that more closely approximates pharmacies' costs.

Conceptually, AMP was based on the retail class of trade. The thinking was that if this number is based on retail pharmacies, then perhaps we can use it to calculate the appropriate reimbursement for what these pharmacies pay. But when you start to peel apart the layers of what goes into that number, it may not be adequate reimbursement or it may not be appropriate.

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