Hillary, AMP, and the Supply Chain

Why do I spend so much time writing about pharmacy reimbursement using Average Manufacturer Price (AMP)? After all, it deals primarily with Medicaid, which now accounts for less than 10% of drug spending.

Here’s why: The outcome of the AMP debate will reshape marketing and distribution policies for both brand and generic manufacturers, while also changing business models within the pharmacy supply chain. The political environment also looks increasingly unfavorable for the pharma industry, judging by Senator Clinton’s (D-NY) recent speech on health care costs.

Reimbursement drives behavior

A core premise of my research and consulting is that reimbursement drives behavior in the pharmacy supply chain – the network of providers, pharmacies, wholesalers, and PBMs that sit between drug makers and patients.

Need proof? Read Some Doctors Quit Injecting Drugs Over Costs from last week’s Wall Street Journal. The article describes how many small physician offices are “…getting out of the business of administering drugs for conditions ranging from anemia and cancer to arthritis and infections, forcing hundreds of thousands of patients to get the drugs elsewhere. It is an unintended consequence of a change in the way Medicare reimburses doctors for a class of drugs that are most often injected or infused.”

In other words, the Average Sales Price plus 6% methodology adopted by Medicare Part B is changing behavior at small providers. As I have pointed out many times before, average price methodologies expose cross-subsidies within the pharmacy supply chain.

AMP will drive behavior

The Deficit Reduction Act (DRA) will trigger even more dramatic changes. Jill Weschler at Pharmaceutical Executive provides a nice summary of the key issues in Medicaid Sets the Pace for Pharma Pricing. A few key points:

• “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.” (I personally predict that AMP will exclude PBM Rebates due to political pressure.)
• “While pharmacists don't like the AMP revisions, they are most upset about rule changes that would lower Medicaid reimbursement for generic drugs significantly.” (Very true, although many states are blunting the impact by topping off AMP.)
• “…CMS plan to publicly disclose AMP data, which the agency collects from manufacturers but previously kept confidential.”
• Rebates paid by manufacturers have declined as patients switched from Medicaid to Part D. (See “Duals create policy duel” pop-up box.)

Last June, I made a number of predictions regarding the impact of AMP. These predictions still appear relevant one year later.

Reimbursement is also a club

Don’t forget that reimbursement can also be used as a club to punish drug manufacturers and the pharmacy supply chain that supports them. IMHO, the political heat around spending will make reimbursement structure even more important to commercial strategy. Is it good to force small providers out of the infusion business? I’m not sure, but I doubt the issue will get a fair hearing in today’s political climate.

Just take a look at Senator Clinton’s (D-NY) recent speech on health care costs. She highlighted prescription drugs as a major contributor to health care costs. This scores political points regardless of the evidence, such as the fact that total U.S. spending on prescription drugs is roughly the same as the additional health care costs incurred because obesity levels have doubled in the past twenty years.

Too bad that “More drugs -- Fewer Twinkies” is not a viable campaign platform.