Changes in pharmacy reimbursement

Big changes are occurring in Medicaid reimbursement for prescriptions and, surprisingly, this has received little attention in the pharmacy press.  Medicaid agencies in 9 states have switched from reimbursement based on Average Wholesale Price (AWP), which provides pharmacies’ with bigger profits on more expensive drugs, to one based on pharmacies’ actual acquisition costs (AAC), where profits are determined by the dispensing fee.  If this trend spreads to private payers, it could have a huge impact on pharmacies’ profits and viability.

What’s the problem with AWP?

For nearly 50 years AWP has been the benchmark used for prescription reimbursement.  And for most of that time, AWP has been widely criticized.  AWP exceeds retail pharmacies’ actual acquisition costs by around 18% for brand-name products and by considerably more for generics.  More importantly, payers are concerned that the AWP-AAC spread can be manipulated by wholesalers and manufacturers.   This criticism came to a head over the last decade as almost every state Medicaid agency sued drug manufacturers over their use of AWP.

Alabama’s response – actual acquisition cost reimbursement

In 2010, Alabama Medicaid changed from a system based on AWPs to one based on AACs.  Alabama hired Myers and Stauffer, an accounting firm with expertise in pharmacy cost estimation, to survey retail pharmacies to collect prescription acquisition cost information.  Based on this information, Alabama Medicaid calculates average actual acquisition costs for retail pharmacies in the state.   Pharmacies are reimbursed at the AAC plus a dispensing fee.  The state surveyed pharmacies to determine their costs of dispensing a prescription and set the fee at the median cost of dispensing.  (The median is the cost at which 50% of pharmacies had higher costs and 50% had lower costs.)  The dispensing fee is currently (and has been since 2010) $10.64.

Alabama Medicaid has stated that AAC provides a transparent, timely, and accurate benchmark for pharmacy reimbursement.   In addition, Alabama projected that the switch to AAC-based reimbursement would save $30,000 per year.  Since 2010, eight more states have adopted AAC-based reimbursement and several more are actively considering the switch.  To support these efforts, the federal Centers for Medicare and Medicaid Services (CMS) has begun collecting AAC data from a national sample of pharmacies.  The CMS-reported AACs are called National Average Drug Acquisition Costs (NADACs).  Like Alabama, CMS has contracted with Myers and Stauffer to survey retail pharmacies.

Concerns with AAC-based reimbursement

There has been some criticism of AAC-based reimbursement.  CMS does not require pharmacies to submit data for NADAC calculations.  Therefore the sample used to calculate NADACs may not be a representative sample of pharmacies.  This is a problem if prices differ substantially across pharmacies.  My understanding is that all retail pharmacies pay about the same prices for branded products, but that costs of generics could vary substantially.  A number of states, such as Alabama and Iowa, require pharmacies to participate in the surveys / provide invoice data.

Another concern is that AACs in most states, and the NADACs, do not include off-invoice rebates.  This is a problem for generics, where off-invoice rebates are common, but I’m not sure it’s a problem for branded products.

How much impact will AAC-based reimbursement have on retail pharmacy? 

At this point, the jury is out due to a number of unresolved issues.  First, how widely will AAC-based reimbursement be used?  On one hand, expansion of Medicaid as a result of the Affordable Care Act should result in more Medicaid prescription volume.  On the other hand, while state Medicaid agencies are adopting the new system, few if any private payers have adopted it. And private payers represent the great majority of prescription sales.  If AAC reimbursement is limited to Medicaid agencies, then the impact could be substantial on some pharmacies and negligible on most.

Second, how will AAC-based reimbursement affect pharmacy profitability?  Adam Fein has commented that:  “Under cost-based reimbursement, a pharmacy trades the volatility of spread-based profits for more-stable fee-based profits. While pharmacy profits may drop slightly, AAC certainly seems more consistent with pharmacists’ desire to be treated as providers, rather than buy-low/sell-high retail merchants.” (Drug Channels blog) But as pointed out by Mike Rupp in a comment to Fein’s post, more-stable fee-based profits depend on adequate dispensing fee.  Alabama’s dispensing fee has not increased since AAC-based reimbursement was implemented in 2011.  As mentioned earlier, Alabama also projected a $30,000 savings from switching to AAC-based reimbursement.  This would equate to an equal decrease in pharmacy reimbursements.

Third, will AAC-based reimbursement change the Medicaid drug mix?  AAC-based reimbursement gives pharmacies’ a financial incentive to increase the use of generic products and minimize use of higher priced branded products.  However, the generic dispensing rate currently exceeds 80% nationally and  state Medicaid programs have implemented preferred drug lists and MAC programs to incentivize pharmacies to dispense generics.  As a result, I’m not sure how much higher AAC-based reimbursement can push generic dispensing rates.

Finally, how will private payers implement cost-based systems if they adopt them?  Medicaid agencies are under both legal and political pressure to provide reasonable reimbursements.   Legislation requires that reimbursements be adequate to provide Medicaid recipients with the same level of access to pharmacies as that enjoyed by patients paying cash or having private insurance.  Politically, state legislators don’t want to set rates at levels that put small, rural pharmacies or inner-city pharmacies out of business.  Private payers are under much less pressure to provide adequate fees.

It will be interesting to see where this goes.  Over the years, AWP-based reimbursement has had remarkable staying power.