New AMP Rule Targets Bona Fide Service Fees

Late Friday, the Centers for Medicare and Medicaid Services (CMS) finally released its long-overdue proposed rule regarding Average Manufacturer Price (AMP) under the Patient Protection and Affordable Care Act (PPACA). Savor all of the bureaucratese for yourself in the Proposed Rule.

In the proposed rule, CMS doubles-down on its use of AMP in the Medicaid program and lays more groundwork for Actual Acquisition Cost (AAC) reimbursement methodologies. 

Manufacturers should pay close attention to this proposed rule because of its potential impact on trade agreements with wholesalers and pharmacies. CMS is proposing important changes to its interpretation of bona fide service fees, while simultaneously choosing not to clarify key items.

Welcome to the ugly underbelly of healthcare reform!

A BIT OF BACKGROUND

AMP is currently used in the computation of manufacturers' rebate obligations to state Medicaid programs. Thanks in part to the PPACA, AMP data will soon be used to compute the Federal Upper Limit (FUL)—the federally established maximum amount that a state Medicaid agency can reimburse a pharmacy for dispensing a multiple source drug to a patient covered by Medicaid.

Due to intense pharmacy industry lobbying, AMP was redefined in the PPACA because of its forthcoming role in pharmacy reimbursement. Pharmacy owners are freaking out because generic reimbursement will be curtailed in some states. See The Pharmacy Reimbursement Hit from AMP-Based FULs. Pharmacy industry lobbyists are panicking because their chest-thumping about winning an “AMP fix” turns out to have been unwarranted. See Take this AMP and Shove it.

OBSERVATIONS ON PROPOSED AMP RULE

Although the PPACA passed in March 2010, CMS has been dodging many unresolved questions about AMP. Coincidentally (or perhaps not), Republicans on the Senate Committee on Finance and House Committee on Energy And Commerce sent this tartly-worded letter last Friday to CMS asking for an update on CMS’s plans regarding AMPs and FULs. And whaddya know? The proposed rule magically appeared the very same day!

In Friday's proposed rule, CMS didn't alter many previously-disclosed pharmacy reimbursement elements. But three items caught my eye:

• On pages 12-14, CMS proposes a switch to the term Actual Acquisition Cost (AAC), perhaps in anticipation of its National Average Drug Acquisition Cost (NADAC). See Coming Soon: Average Acquisition Costs for Pharmacies.

• On pages 117-122, CMS uses Indiana's state maximum allowable cost (SMAC) list to justify its FUL methodology. Expect lots of controversy over these computations.

• On page 50, CMS proposes including "entities conducting business as retail community pharmacies or wholesalers, including but not limited to Specialty Pharmacies, Home Infusion Pharmacies and Home Healthcare Providers." This broadens the group beyond "retail community pharmacies."

For more details on AMP, AAC, and the impact on the pharmacy industry, see the 2011-12 Economic Report on Retail and Specialty Pharmacies, especially Chapter 5 and the last two sections of Chapter 8.

BONA FIDE SERVICE FEES

Bona fide service fees are very important in trade and channel management. For example, specialty pharmacies are often compensated by pharmaceutical manufacturers with bona fide service fees. Pharmaceutical wholesalers can be compensated with bona fide service fees in distribution service agreements.

Per the PPACA, bona fide service fees are excluded from the computation of AMP. Section 2503 of the Affordable Care Act states:

“bona fide service fees paid by manufacturers to wholesalers or retail community pharmacies, including (but not limited to) distribution service fees, inventory management fees, product stocking allowances, and fees associated with administrative services agreements and patient care programs (such as medication compliance programs and patient education programs)”

In Friday's proposed rule, CMS adds to this statutory language in two important ways:

• Retroactive price adjustments, a.k.a. price appreciation credits in channel agreements, will not be considered "bona fide service fees." CMS claims that these amounts do not reflect any service or offset of a bona fide service performed on behalf of the manufacturer. Therefore, CMS wants to include them in the AMP computation, which could decrease AMP.

• GPO fees (beyond what's listed in the statute) will be considered bona fide service fees and excluded from AMP, which could increase AMP.

At the same time, CMS is declining to clarify important terms such as “fair market value,” stating:

“We continue to be concerned that these fees could be used as a vehicle to provide discounts, as opposed to fees at ‘fair market value’ for bona fide services. Thus, to avoid potential fraud concerns, we are retaining our definition, but we have chosen not to define ‘fair market value’ at this time.” (emphasis added)

Gee, thanks. I didn’t find their justification to be very comforting:

“Due to the rapidly changing market in which new types of arrangements arise, we believe that manufacturers should appropriately determine fair market value and make reasonable assumptions consistent with adequate documentation that will support their payment for these services at fair market rates sufficient that an outside party can determine the basis for the fair market value determination.”

My plain English interpretation?

“CMS hopes that manufacturers can guess what we want. And if a manufacturer guesses wrong, it would be a darn shame...for them.”

Comments on the proposed rule are due by April 2. ‘nuff said.