Legislative and Regulatory Issues Affecting Generic Drug Reimbursement

US Pharm. 2012;37(6)(Generic suppl):22-27.

According to the IMS Institute, between 2006 and 2010 total drug spending increased from $270 to $307 billion. This 14% increase in prescription drug spending represents a sharp fall from the 42% increase experienced between 2001 and 2005.¹ This decline was largely attributable to increased spending on generic drugs, which went from $35 billion in 2006 to $78 billion in 2010. Over this time period, spending on branded drugs decreased from $235 billion to $229 billion.¹

Generics and Cost Savings

The increased use of generic medications has been an important strategy in managing overall pharmaceutical spending, including Medicaid prescription-drug spending. Relying on data from the Kaiser Family Foundation, it is estimated that between 2006 and 2010, total drug spending in Medicaid increased from $20 billion to $25.7 billion, while spending on generic drugs increased from $2.5 billion to $4.5 billion.² In 2010, generic drug spending represented roughly 18% of total Medicaid drug spending, with 69% of all Medicaid prescriptions being generic.²

In 2009, the Generic Pharmaceutical Association (GPhA) estimated that the average brand prescription cost Medicaid about $200, which is 10 times more expensive than the $20 Medicaid paid on average for a generic prescription.³ Furthermore, an analysis conducted by the IMS Institute showed that between 2001 and 2010, the use of generic prescription drugs saved the U.S. health system $931 billion, and that increasing generic use by one percentage point saves Medicaid roughly $650 million annually.³

If the generic dispensing rate for Medicaid were to increase from the current rate of 69% to the current retail rate of 78%, Medicaid would save $5.85 billion annually. Over the next 5 years, this would result in nearly $30 billion in savings. With the early stages of the so-called “patent cliff” upon us, combined with the expected increase in Medicaid enrollment, $30 billion in savings and a generic dispense rate of 78% are conservative estimates of what Medicaid can achieve.³

The importance of generic drugs to government health care programs—on both the federal and state levels—cannot be understated. A recent Government Accountability Office (GAO) report found that 36% of all prescription drug spending (about $93.3 billion in 2010) in the retail pharmacy settings was for public programs, notably Medicare Part D and Medicaid.⁴ Of all government spending on prescription drugs, 90% was for federal programs, with 71% in Medicare Part D, 18% in Medicaid, and the remainder distributed over the Department of Defense, Department of Veterans Affairs, and others.⁴

The upcoming expansion of Medicaid in 2014 as a result of the health care reform law will sharply increase the number of individuals covered under the Medicaid programs.⁵ States may decide to enroll these patients in managed care plans, as most are expected to be childless adults. States will also be creating exchanges where, in 2014 as well, uninsured individuals, small businesses, and unemployed individuals can purchase subsidized health insurance coverage. In any event, Medicaid will become a more important payer for community pharmacies in the not-too-distant future. That is why it is so important to understand the changes coming to Medicaid pharmacy reimbursement.

Changes in Medicaid Pharmacy Reimbursement

Medicaid pharmacy reimbursement has been in flux since enactment of the Deficit Reduction Act (DRA) of 2005, which changed the manner in which federal upper limits (FULs) are calculated for multiple-source drugs. These FULs for hundreds of multiple-source drugs are set by the Centers for Medicare and Medicaid Services (CMS) and determine the maximum amount of federal Medicaid matching funds for a state for a market basket of multiple-source drugs. The lists had previously been based on the published average wholesale price (AWP) and wholesale acquisition cost (WAC), benchmarks that do not represent real pharmacy transaction prices. Congress changed the basis for the FULs to the average manufacturer price (AMP) in 2005 in an effort to more closely approximate a retail pharmacy’s purchasing costs. In reality, AMP does not match pharmacy purchasing costs because larger pharmacies purchase generics at better prices than independents and smaller chains, and because AMP is the average price manufacturers pay to wholesalers for drugs dispensed to retail pharmacies.⁶

However, Congress believed that AMP was more closely related to a pharmacy’s transaction price than was AWP or WAC. These AMP-based FULs were supposed to go into effect in 2007, but a federal court determined that CMS had incorrectly implemented them through their final regulation.⁶ As a result, FULs for generics have not been updated since 2008, meaning that pharmacies are being severely underpaid for many generics whose prices have increased significantly since that time. The federal court injunction against the 2007 AMP regulation was lifted in 2010, but Congress also made several changes to the DRA Medicaid pharmacy reimbursement charges in the Patient Protection and Affordable Care Act (PPACA) of 2010. In February 2012, CMS issued a proposed regulation implementing the changes made in the PPACA.⁷ CMS said it would make the new regulation final in 2013. This is a concern, as many manufacturers, pharmacies, and other supply chain partners want a better idea of how CMS will require manufacturers to calculate their AMPs and FULs, which will affect not only pharmacy reimbursement but the rebates that manufacturers pay to states for Medicaid drugs as well.

Effects of FULs: Even though CMS has not published a final regulation governing the calculation of AMP or the setting of FULs, the PPACA gave the agency the authority to set FULs, as well as required changes in the way manufacturers calculate their AMPs. As a result, since last fall CMS has been publishing draft FUL lists for multiple-source drugs, based on data it is collecting from manufacturers, including AMP data as well as monthly utilization data.⁸ CMS is calculating the FUL as 175% of the weighted-average AMP for a particular dosage form and strength of a multiple-source drug. While states are not required to use these lists, and federal matching funds are not being based on these amounts, FULs are sending signals to the states about what FULs might look like in relation to their current maximum allowable cost (MAC) prices.

The draft lists that have been published use a weighted-average AMP for each multiple-source drug for which there are at least three A-rated sources of supply.⁸ Supply chain participants have been analyzing the draft lists and trying to determine how the lists compare to their acquisition costs. For community pharmacies—especially independents—the draft lists are particularly problematic. That is because many FULs are lower than a pharmacy’s acquisition costs. Estimates are that about 38% to 40% of FULs are below independent pharmacies’ acquisition costs; thus, the typical independent could lose the same percentage of its Medicaid revenues if these FULs are implemented.⁹ Given that many states already underpay pharmacies for dispensing medications, severe reductions in generic-drug payments through these new FULs, which represent almost 75% of all Medicaid prescriptions, could be devastating for independent pharmacies, especially if the dispensing fees are not adjusted by the states.³

CMS proposes to set the FUL at no greater than 175% of the weighted-average AMP.⁷ To ensure that AMPs used to calculate reimbursement most closely approximate retail pharmacy purchasing costs, the law requires that manufacturers include sales only to retail community pharmacies, defined as independent, chain, mass merchandise, or supermarket pharmacies. Sales to other entities such as mail-order pharmacies, hospitals, or physicians are excluded. In calculating AMP, manufacturers can use a 12-month rolling percentage to estimate the value of lagged price concessions. This will minimize the extent of sudden monthly fluctuations in AMP, which can affect the AMP-based FULs.

Unfortunately in the proposed regulation, CMS does not take advantage of the flexibility in the law to set the FUL at greater than 175% of the weighted-average AMP in certain justifiable cases.⁷ It makes sense for CMS to give itself the ability to use this flexibility. For example, CMS could use such authority to:

• Set FULs higher than 175% of the weighted-average AMP for drugs that are suddenly in short supply and experience abrupt price spikes (since AMPs are lagged by several months)
• Assure that community pharmacies are being adequately reimbursed for 5i drugs (explained below), given that nonretail pharmacy AMPs, when used to set FULs, could be below the pharmacy’s acquisition cost, even at 175% of the weighted-average AMP
• Ensure that any FUL is set at the NADAC value (explained later), given that these values may not be used by states if they are lower than the FUL
• Assist independent community pharmacies and small chains that purchase generics at a higher cost than large chains.

Pharmacies’ reimbursement will also be affected with respect to 5i drugs (i.e., infusion, injection, inhalation, instilled, and implanted), because the proposed regulation implements the AMP policy relating to 5i drugs covered by Medicaid. CMS needs manufacturers to report AMPs for these categories of drugs so states can collect rebates on them, many of which are traditionally administered in physicians’ offices. The law allows manufacturers to include nonretail pharmacy sales in the calculation of the AMPs for these drugs at a certain threshold.¹⁰ This threshold is important, as manufacturers can include nonretail community pharmacy sales in calculating the AMP for such drugs only when 10% or fewer of the sales are to retail community pharmacies. However, CMS will use the AMPs from these drugs to calculate FULs for these products. Since the AMPs will include nonretail pharmacy sales, which tend to be lower in price than retail pharmacy sales, there is a legitimate question about whether 175% of the weighted-average AMP for these products is sufficient to reimburse pharmacies for these multiple-source drugs.

Publication of AMPs and Other Reimbursement Benchmarks

Get ready for another alphabet soup of pharmacy reimbursement. Under the law, CMS could publish weighted-average AMPs for each multiple-source drug only; no individual AMPs could be published for individual single-source or multiple-source drugs.⁵ Thus, both Medicaid and other payers will know the approximate cost to pharmacies of purchasing various multiple-source drugs. At the same time that CMS is attempting to publish new FULs for generics, it is embarking on another initiative that would result in the monthly publication of NADAC—a National Average Drug Acquisition Cost benchmark.¹¹

The NADAC would be based on actual invoice prices collected by CMS (by its contractor, Myers and Stauffer) from retail pharmacies.¹¹ A single NADAC would be published for each single-source drug and each manufacturer or distributor’s version of a multiple-source drug. This would give state Medicaid programs an additional benchmark to potentially use for pharmacy reimbursement. This NADAC is being published, CMS claims, because states are asking for a better approximation of pharmacy’s acquisition costs. At the time of this article, CMS had not yet issued the first NADAC survey to pharmacies. CMS has said that this monthly-determined NADAC benchmark would be helpful to states that want to use actual acquisition cost (AAC) as the basis for pharmacy reimbursement.⁷ In fact, the states may have no choice. The proposed CMS regulation implementing the new FULs also includes a requirement that states use AAC rather than the estimated acquisition cost (EAC) to pay pharmacies for single-source drugs and multiple-source drugs that do not have FULs. Most states have traditionally based EAC on a discount off the published AWP or a markup on the published WAC.

To implement an AAC reimbursement policy, states may either have to conduct their own regular costly surveys or rely on the NADAC survey that CMS claims it will produce for states. Yet some states may believe that the NADAC does not represent the costs to pharmacies in that state, perhaps because that state has a disproportionate share of independent pharmacies. Or, maybe states want to create a differential reimbursement between independents and chains or rural and urban pharmacies to meet particular access issues or concerns. This could force states to do their own AAC surveys.

Moreover, as it has done with previous states that have already moved to AAC (e.g., Alabama and Oregon), CMS may require that states use only AAC if they increase their dispensing fees to more accurately reflect pharmacies’ costs to dispense. For example, after it moved to AAC-based reimbursement, Oregon increased its dispensing fee to $10.65, while Alabama went to $10.64.⁷ This is important for both retail community pharmacies and pharmacies that serve long-term care facilities.

CMS will also be publishing another benchmark known as RSP—retail survey price.¹² This additional benchmark will give Medicaid and the states a sense of the amount of payment that pharmacies are accepting from various payers—cash, third party, and Medicaid. This is supposed to help states determine whether they are paying more than other payers for prescription drugs. However, unlike other payers, pharmacies must provide prescriptions to Medicaid patients whether they pay the copay or not. Many states are implementing or increasing copays, meaning there are more chances that pharmacies may not be able to collect copays, and states cannot make pharmacies whole for uncompensated copays. Thus, states may look at RSP as a benchmark to determine how they reimburse, but they should remember that pharmacies have higher costs in Medicaid than they do in private, commercial third-party programs.

Paying Independent Pharmacies More for Generics

Independent community pharmacies have a case to make that AMP is not a great reimbursement benchmark and that they should be paid higher amounts than other pharmacies for generic medications. For example, a recent Office of Inspector General (OIG) report confirms that AMP is the least consistent reimbursement benchmark when compared to pharmacy invoice prices.¹³ The report also found that it will take a multiplier higher than 175% of AMP just to get FULs to a level equal to pharmacy acquisition costs, and this is particularly the case for smaller independent pharmacies. For example, the report found that⁸:

• For multiple-source generic drugs without an FUL, rural independent pharmacy acquisition costs are 221% of AMP, while for urban independent pharmacies they are 203%
• For multiple-source drugs with an FUL, the acquisition costs of rural independent pharmacies are 249% of AMP, while for urban independent pharmacies they are 240%.

Given that state dispensing fees are generally paying pharmacies a fraction of their actual dispensing costs, pharmacies continue to need to make some “margin” on product reimbursement to remain in business. This is especially true since Medicaid is not “marginal” business to the average independent pharmacy, and the number of Medicaid patients is expected to increase significantly in 2014. Paying pharmacies at only 175% weighted-average AMP—or lower, as many states may do through their MAC programs—is simply insufficient to cover pharmacy costs of purchasing and dispensing Medicaid prescriptions.

This argues for CMS to set a higher FUL for independent pharmacies that, according to the OIG report, have higher acquisition costs than publicly traded chains.¹³ The statute requires that CMS set the FUL at “no less than” 175% of the weighted-average AMP.⁷ However, it implicitly grants the secretary of HHS the flexibility and authority to set FULs at a higher rate that recognizes the variance in acquisition costs by small community pharmacies as compared to large chain pharmacies. Given the vital role independent community pharmacies play in serving Medicaid patients, CMS should consider using this authority to increase FULs for privately held community pharmacies beyond the minimum 175% weighted-average AMP. The need to use this authority is critical given the potentially dire impact that these FULs will have on smaller pharmacies.

Despite aggressive, continuing efforts to negotiate and obtain lower prices, small community pharmacies, including smaller chains, purchase generic drugs at a relative premium. According to the National Community Pharmacists Association (NCPA), this can result in acquisition costs that are often at least 25% to 50% higher than those of publicly held chain pharmacies. For that reason, small pharmacies will likely always face tighter margins for prescriptions dispensed to Medicaid beneficiaries than national chains for the same multiple-source drug. This has been also recently confirmed by the OIG report, which found that⁸:

• For multiple-source generic drugs without an FUL, the average urban independent buys 50% higher than an urban chain, while a rural independent buys at a third higher than a rural chain
• For multiple-source generic drugs with an FUL, the average urban independent buys 80% higher than an urban chain, while a rural independent buys at about 40% higher than a rural chain.

State Medicaid Requirements to Justify Reimbursement Changes

CMS is proposing changes in the way states modify their Medicaid pharmacy reimbursement.⁷ That is, states must “provide adequate data” when proposing changes to the ingredient cost reimbursement or professional dispensing fee for reimbursement. Too often, states have proposed, and CMS has indiscriminately approved, devastating Medicaid reimbursement reductions to community pharmacies that have resulted in pharmacy closures, reduced access, and impaired quality of care. Community pharmacies hope that CMS will, through this proposal once codified, require that states demonstrate, through state-based surveys only, that their ingredient costs reimbursement and dispensing fees are reflective of pharmacy costs of dispensing. The requirements for approval of state plan amendments (SPAs) should also extend to different classes of pharmacies, as pharmacies have different costs of purchasing as well as different costs of dispensing.

CMS should also require states to demonstrate that both their brand-name drug reimbursement and MAC lists for generics are justified based on state-based data, and not permit states to make reductions in these MAC lists without justification to CMS. State contractors can indiscriminately change MAC values for generics without any clear or obvious reason for making such changes. States should be required to demonstrate that their MAC methodology is based on community pharmacies’ costs of purchasing prescription drugs, and also include a process by which such values are changed so that they are more transparent to the pharmacy. Adequate generic reimbursement is vital to creating incentives for pharmacies to dispense generics, which saves federal and state Medicaid programs a significant sum of money.

REFERENCES

1. IMS Institute for Healthcare Informatics. The Use of Medicines in the United States: Review of 2010. Parsippany NJ: IMS Health Inc; April 2011. www.imshealth.com/imshealth/Global/Content/IMS%20Institute/Documents/IHII_UseOfMed_report%20.pdf. Accessed May 3, 2012.
2. Kaiser Family Foundation. Prescription Drug Trends. Washington, DC: The Henry J. Kaiser Family Foundation; May 2010. www.kff.org/rxdrugs/upload/3057-08.pdf. Accessed May 3, 2012.
3. Generic Pharmaceutical Association (GPhA), IMS Institute, IMS Health. Savings: An Economic Analysis of Generic Drug Usage in the U.S. Washington, DC: GPhA; September 2011.
4. Government Accountability Office (GAO). Drug Prices: Research on Savings from Generic Drug Use. Report GAO-12-371R. Washington, DC: GAO; January 2012. www.gao.gov/assets/590/588064.pdf. Accessed May 3, 2012.
5. The Patient Protection and Affordable Care Act of 2010, P.L. 111-148.
6. Coster JM. Changes in Medicaid reimbursement: implications for generic manufacturers and pharmacies. US Pharm. 2011;36(5)(Generic suppl):12-20. www.uspharmacist.com/content/s/167/c/28603/. Accessed May 3, 2012.
7. Centers for Medicare and Medicaid Services (CMS). Medicaid program; covered outpatient drugs. 42 CFR Part 447. Fed Regist. 2012;77(22):5318-5367.
8. Medicaid & CHIP program information. CMS. www.medicaid.gov/Medicaid-CHIP-Program-Information/By-Topics/Benefits/Prescription-Drugs/Prescription-Drugs.html. Accessed May 5, 2012.
9. Coster JM. NCPA letter to Cindy Mann, director, CMS. Fourth draft AMP-based FULs for Medicaid multiple source drug reimbursement. January 25, 2012. www.ncpanet.org/pdf/leg/jan12/cmsfulletterjan12.pdf. Accessed May 5, 2012.
10. Health Care and Education Reconciliation Act of 2010, P.L. 111-152.
11. CMS. Agency information collection activities: submission for OMB review; comment request. March 2, 2012. CMS-10241. Fed Regist. 2012;77(42):12847.
12. Payment for covered outpatient drugs. Social Security Act §1927(f).
13. Office of Inspector General (OIG). Review of Drug Costs to Medicaid Pharmacies and Their Relation to Benchmark Pricing (A-06-11-00002). Washington, DC: OIG; October 2011. http://oig.hhs.gov/oas/reports/region6/61100002.pdf. Accessed May 3, 2012.

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