US Pharm. 2010;35(6)(Generic Drug Review suppl):14-19.
Generic drugs remain the best bargain in health care, and given the recent enactment of health care reform legislation (The Patient Protection and Affordable Health Care Act, P.L. 111-148),1 the use of generic medications is likely to increase significantly. That is because tens of millions of new Americans will have access to health insurance starting in 2014 through a combination of Medicaid expansions and an increase in the availability of federally sponsored private health insurance. Prescription drug coverage will be mandated as part of these new health insurance plans.
This means that federally sponsored health care plans will pay for even more prescription drugs than they do now, and federal reimbursement policies will have more influence on how generic drugs are used and how they are dispensed. Right now, federal government programs pay for, on average, about half of all prescriptions dispensed by independent community pharmacies.2 That includes Medicare Part D, Medicaid, the Federal Employees Health Benefits Program (FEHBP), TRICARE (military health plan), the 340B Drug Pricing Program, and Veterans Affairs (VA) prescriptions. For that reason, it is important for federal payment policies to create incentives for pharmacists to work with physicians and health plans to use generic drugs where appropriate for the patient. TABLE 1 analyzes the current utilization of generic drugs.
Medicaid Generic Drug Reimbursement Policies
Promoting the dispensing of low-cost generic drugs is an important part of states’ Medicaid program strategies to contain drug costs. Based upon a National Community Pharmacists Association (NCPA) analysis of Medicaid claims data, the average price of a generic prescription under Medicaid is $20.61, about one-ninth of the price of a brand, which is $195.54.3 Because of this wide price disparity, generics represent approximately 66% of all Medicaid prescriptions, but only 22% of Medicaid spending.3 However, Medicaid’s generic substitution rate is in the mid-90th percentile,3 so any growth in the use of generics in Medicaid will have to come from interchanging generic drugs within a brand drug class (known as therapeutic interchange) with the permission of the patient’s physician.
Reimbursement policies can have a significant impact on the frequency of generic drug use. Under the Medicaid program, the federal Medicaid program sets federal upper limits (FULs) for generics, and then the states can either pay these amounts (plus a dispensing fee) or lower them. Even though the federal government sets an FUL for close to 600 generics, many states have their own maximum allowable cost (MAC) lists that set generic reimbursement rates lower than the FULs or have generic products that are not on the federal list.3
FULs have generally been based on 150% of the lowest published price of a generic if there are three or more sources of supply for the generic.4 The published price has generally been average wholesale price (AWP) or wholesale acquisition cost (WAC). Based upon an internal analysis of Medicaid data performed by the NCPA, about 62% of all generic prescriptions dispensed under Medicaid have an FUL, and FUL drugs are responsible for 53% of all generic drug expenditures under Medicaid.3 The ability of FULs to impact pharmacy reimbursement is evidenced by the fact that the average price of a generic prescription not on a FUL under Medicaid is $25.44, while the average price of a generic prescription covered under the FUL is $17.77.3 That is approximately an $8 difference or about a third less reimbursement than a generic without an FUL.
Even though generic drug spending was only a small relative percentage of all Medicaid drug program spending, federal policymakers were concerned that use of AWP or WAC to set reimbursement for generics was resulting in excessive reimbursement. They contended that published AWP and WAC values do not represent actual pharmacy purchase prices. These concerns led to enactment of the Deficit Reduction Act of 2005 (DRA). The DRA reduced the maximum amount of federal money that states would receive for generic drugs by lowering the FUL reimbursement amount to 250% of the lowest average manufacturer price (AMP) value of a generic.5
AMP is supposed to represent the average price paid by community retail pharmacies to wholesalers for a particular drug, which in theory is closer to the pharmacy’s true acquisition cost. AMP is calculated and reported now by manufacturers for the purposes of determining a manufacturer’s rebate liability to states that have paid for drugs of that manufacturer. Thus, 250% of the lowest AMP would appear to reimburse pharmacies sufficiently for their generic drug acquisition costs, correct? Maybe not.
Several government studies showed that the 250% lowest AMP rates would reimburse pharmacies below the average acquisition cost for Medicaid generic drugs.4 One General Accountability Office (GAO) study found that it would reimburse 36% below costs; another found 17% below costs.6 As a result, pharmacies would lose money on every Medicaid generic prescription dispensed. This could encourage the use of higher-cost brands, resulting in higher Medicaid spending. In addition, given that the average independent pharmacy pays higher amounts to purchase generics than larger chain pharmacies, these cuts could be particularly devastating. This fact could also create access issues, as independent pharmacies serve a disproportionate share of Medicaid patients. Taken together, many pharmacies could be forced to close or reduce their hours. This could adversely affect Medicaid patients’ access to pharmacy services, also resulting in even higher health care costs.
Since 2007, these Medicaid generic drug cuts have been delayed because of a December 2007 federal court injunction won by the NCPA and the National Association of Chain Drug Stores (NACDS).7 The court determined that the Centers for Medicare and Medicaid Services (CMS) did not define AMP correctly, thus lowering generic reimbursement even more than the law envisioned, and that these cuts would adversely impact patient access to pharmacies. According to an independent expert, up to 11,000 pharmacies—about a fifth of all community pharmacies—would close if these cuts went into effect.8 The NCPA has advocated a legislative solution to mitigate the impact of these generic drug cuts, and the new health care law provides that relief in part.
The health care reform law improves the definition of AMP so that it includes only manufacturers’ sales to retail pharmacies. It directs the CMS to set a Medicaid FUL for reimbursement of generics at a rate of “no less than 175% of average weighted AMP.”9 This new reimbursement amount would be higher than the 250% of lowest AMP now in current law but under court injunction. The NCPA also worked closely with Congress to secure report language to the bill that encourages the secretary of Health and Human Services (HHS) to increase the reimbursement even further for small, independent community pharmacies.
This increase in the FUL is especially important because the new health care reform law also expands Medicaid coverage—starting in 2014—to individuals up to 133% of the federal poverty level.10 This is expected to add 16 million more individuals to the Medicaid program. Thus, pharmacies will be serving more Medicaid patients in the future, making the need to have adequate generic drug reimbursement critical.
The new law requires the secretary of HHS to implement the new Medicaid generic drug rates in October 2010,1 just a few months from now. This means that pharmacies in some states may see a reduction in generic drug reimbursement at that time, although more likely not until early next year. The reduction, if any, will depend on the aggressiveness of a state’s current generic MAC rate. Some states may already have generic rates that are at or even below the new FUL rates.
However, this new law mitigates the impact of the more draconian generic drug cuts that would have gone into effect had these changes not been made, saving pharmacies approximately $3 billion in Medicaid generic drug cuts over the next 10 years.11 Remember that states can further lower these rates if they believe that the FULs do not reflect the pharmacy’s acquisition costs. States should, however, be balancing these lower generic drug rates with the need to pay pharmacies an adequate dispensing fee, so that incentives to dispense generics can be maintained.
Pharmacies may need to work aggressively with their state Medicaid offices and state legislatures to mitigate the impact of these cuts by increasing the dispensing fees. States need to maintain incentives for pharmacies to dispense generics. A state that needs to decrease its MAC to stay below the new FULs may want to consider increasing its dispensing fees to help make pharmacies “whole” and continue to provide incentives to dispense generics.
While the new FUL rates will apply only to Medicaid generics, weighted average AMPs for brand and generic drugs will be made public later this year. A single weighted AMP value will also be calculated and posted for a particular dosage form and strength of a generic using all the manufacturers’ AMPs for that generic. (CMS should be determining this by weighting the AMPs by the generic’s unit sales and posting a single weighted average AMP for all the manufacturers of that generic.)
The law also requires disclosure of retail survey prices (RSPs).1 These represent the average amount of reimbursement a typical pharmacy receives for a particular prescription from all sources—third party, Medicaid, and cash. This is supposed to be inclusive of product reimbursement plus dispensing fee. The new law specifically requires CMS to exclude mail order and long-term care prices when calculating the RSP.
All these data will give payers access to more pharmacy purchasing and reimbursement information, with AMP being possibly considered the “in the door” price and RSP being the “out the door” price. Whether this will be the case in reality, only time will tell. Other third parties may review the AMP and RSP values that are posted and compare them to the reimbursement rates that they are paying. Thus, these changes may have impact for pharmacies beyond Medicaid.
Medicare Part D Changes
The new health care reform law also makes some important changes to generic drug coverage under Medicare Part D. The law will close the Medicare Part D “donut hole” over the next 10 years—phasing down beneficiary cost sharing to 25% by 2020.12 This is the cost-sharing amount that beneficiaries now pay before they reach the donut hole.
Currently, Medicare beneficiaries pay 100% of the negotiated price for a drug in the donut hole, although some plans pay for some or all generics that are dispensed in the donut hole.13 Part D plans will be paying for a certain percentage of generics dispensed in the donut hole, starting at 93% in 2011 and phasing down about 7% each year until 2020, when the cost sharing for a generic will be 25%.12 A similar phase-down will occur for brand name drugs. Because these are lower in cost, beneficiaries will still have strong incentives to ask for generic drugs in the donut hole. The law also allows Part D plans to waive generic copays to encourage beneficiaries to ask for generics.
Pharmacy Benefit Manager Transparency Requirements
The new health care law will help third-party payers know how much they are paying for generics and whether more generics can be used to lower drug costs. The law requires pharmacy benefit managers (PBMs) to confidentially disclose important financial information to the plans and the secretary of HHS for the health plans operating in the new health insurance exchanges. These new exchanges are set to go into effect in 2014. These provisions establish an important initial federal framework for the regulation of PBMs, which can be enhanced in the future (TABLE 2). Many private and public sector payers have already adopted PBM transparency, and this has resulted in a reduction in drug costs.14,15
Conclusion
Generics are an important part of most health plans’ cost containment strategies, and pharmacists remain a vital part of assuring that generics use is maximized. Policymakers need to be sure that strong incentives remain for pharmacists to dispense generics. Policies that make AMP or RSP data more transparent will provide important information to the marketplace, but these policies can have a dampening effect on generic drug use if they are interpreted or used incorrectly. PBM transparency will further enhance the use of generics by helping third-party payers better understand whether brand name drugs are being pushed by PBMs at the expense of lower-cost generics.
REFERENCES
1. The Patient Protection and Affordable Health Care Act, P.L. 111-148. http://democrats.senate.gov/
2. Stone D. 2009 NCPA Digest, sponsored by Cardinal Health. Alexandria, VA: National Community Pharmacists Association; October 2009.
3. Based upon an internal analysis by the NCPA using State Drug Utilization Data from the Centers for Medicare and Medicaid Services, and data from other sources. State Drug Utilization Data can be accessed at: https://www.cms.gov/
4. U.S. Government Accountability Office. Medicaid Outpatient Prescription Drugs: Estimated 2007 Federal Upper Limits for Reimbursement Compared with Retail Pharmacy Acquisition Costs. GAO-07-239R Medicaid Federal Upper Limits. December 22, 2006. www.gao.gov/new.items/d07239r.
5. Deficit Reduction Act of 2005, P.L. 109-171. Title VI, Subtitle A, Sec. 6001. http://frwebgate.access.gpo.
6. U.S. Government Accountability Office. Medicaid Outpatient Prescription Drugs: Second Quarter 2008 Federal Upper Limits for Reimbursement Compared with Average Retail Pharmacy Acquisition Costs. GAO-10-118R Medicaid Federal Upper Limits. November 30, 2009. www.gao.gov/new.items/d10118r.
7. Injunction puts brakes on AMP. Drug Topics. December 18, 2007. http://drugtopics.
8. PriceWaterhouseCoopers. Impact of the Deficit Reduction Act of 2005 on Pharmacies by State. May 12, 2008. www.nacds.org/user-assets/
9. The Patient Protection and Affordable Health Care Act, P.L. 111-148. Title II, Subtitle F, Sec. 2503. http://democrats.senate.gov/
10. Kaiser Family Foundation. Optimizing Medicaid Enrollment: Perspectives on Strengthening Medicaid’s Reach under Health Care Reform. April 7, 2010. www.kff.org/healthreform/
11. Foster R. Estimated Financial Effects of the “Patient Protection and Affordable Care Act,” as Amended. Office of the Actuary for Centers for Medicare and Medicaid Services (CMS). Table 4, Sec. 2503. April 22, 2010. https://www.cms.gov/
12. Kaiser Family Foundation. Explaining Health Care Reform: Key Changes to the Medicare Part D Drug Benefit Coverage Gap. March 2010. www.kff.org/healthreform/8059.
13. Kaiser Family Foundation. Medicare Part D 2010 Data Spotlight: The Coverage Gap. November 2009. www.kff.org/medicare/upload/
14. Balto D. Reigning in PBM Mischief After Health Care Reform. Presentation for the National Legislative Association on Prescription Drug Prices. November 2009. http://66.203.151.63/
15. Prescription Policy Choices. PBM Fiduciary Duty and Transparency. www.policychoices.org/
16. Trompeter E. 2000-2009 Survey Results. Pharmacy Benefit Trends and Data: Costs, Benefit Design, Utilization, PBM Market Share. Atlantic Information Services, Inc; 2009. www.aishealth.com/Products/
17. Generic Pharmaceutical Association. Economic Analysis of Generic Pharmaceuticals 1998-2008, $734 Billion in Health Care Savings. May 2009. www.gphaonline.org/about-gpha/
18. The Patient Protection and Affordable Health Care Act, P.L. 111-148. Title VI, Subtitle A, Sec. 6005. http://democrats.senate.gov/
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