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Washington Report: Medicaid Sets the Pace for Pharma Pricing


Pharmaceutical Executive

Pharmaceutical ExecutivePharmaceutical Executive-04-01-2007
Volume 0
Issue 0

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.

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.

Jill Wechsler

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.

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.

Duals create policy duel

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.

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.

Raising rebates

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.

But the resulting discrepancy with AMP exclusions raises multiple questions from marketers and payers. One solution from the Bush administration, as proposed in its 2008 budget plan, is to do away with best price altogether and establish a flat Medicaid rebate program. Such a change supposedly would encourage marketers to extend discounts to other purchasers, and CBO estimates that a flat 20 percent rebate would save Medicaid $1.4 billion through 2012. That's a big hit for pharma, and it could attract support on Capitol Hill.

Less for Generics

While pharmacists don't like the AMP revisions, they are most upset about rule changes that would lower Medicaid reimbursement for generic drugs significantly. This involves a big change in calculating the Federal Upper Limit (FUL), which sets an annual aggregate spending cap on CMS payments for multisource drugs. The proposed rule would base FUL on 250 percent of AMP, instead of 150 percent of the lowest published price (usually AWP), and extend FULs to more drugs. These changes would noticeably cut state payments for generic drugs, and the 2008 budget plan would reduce payments even more by recommending an FUL of only 150 percent of AMP.

While CMS anticipates big savings from the new FUL calculation, the policy "will significantly underpay pharmacies and will yield lower rebates," predicts John Coster, vice president of the National Association of Chain Drug Stores (NACDS). It's fine to devise a more accurate drug reimbursement system, he observes, but federal and state officials should recognize that higher margins on drugs currently make up for too-low dispensing fees. While AWP has been accused of really meaning "ain't what's paid," AMP can be translated into "ain't more precise," he quips.

Pharmacists have considerable clout on Capitol Hill and may succeed in modifying the proposed rule. Senate Finance Committee chairman Max Baucus (D-Mont) recently called on CMS to take a hard look at its plan for redefining AMP, noting that "CMS' proposal may cut rates too drastically, particularly for small and rural pharmacies."

More Transparency

Another new policy that draws united opposition from manufacturers, PBMs, and pharmacists is the CMS plan to publicly disclose AMP data, which the agency collects from manufacturers but previously kept confidential. CMS is already providing AMP data to states to help Medicaid officials calculate reimbursement more accurately, but it has delayed broader public disclosure until the regs are final. Manufacturers complain that the data will be constantly out-of-date, that it will be used by other payers for reimbursement purposes, and that the new system should be phased in to allow time for CMS to iron out the kinks.

But Medicare Part D critics claim that such information will shed much-needed light on the whole drug-pricing system. One way to address the Medicare price-negotiating issue, according to Johns Hopkins economist Gerald Anderson, is to compare the lowest price paid for a drug by Part D plans with prices paid by the VA, Medicaid, and Canadian pharmacies. CMS analysts report that drug prices under the Medicaid rebate program are several percentage points below prices negotiated by Part D plans, and more comparative studies could provide a better picture of whether Medicare drug plans really can negotiate best prices.

Another hint at real Part D rates is what seniors in the "doughnut hole" have to pay out-of-pocket for drugs. While doughnut-hole payments reflect plans' contracted prices, they don't include rebates, and disclosure of the differences may raise an outcry.

Anticipated changes in Medicaid reimbursement formulas already are drawing payer interest. A new Colorado generic-drug discount card program, for example, uses AMPs to set a price floor for reimbursement, points out PBM consultant Carrie Gavora. The new Medicaid rule will lead to a "shrinking toward the mean in the out years," she notes, which "ultimately, is not a good thing for consumers."

Jill Wechsler is Pharm Exec's Washington correspondent. She can be reached at jwechsler@advanstar.com

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