List-price based reimbursement took another hit last week in the long-running multi-district litigation concerning allegedly inflated list prices such as Average Wholesale Price (AWP) and Wholesale Acquisition Cost (WAC). The ruling disclosed truly eye-popping (50,000%+) spreads between pharmacy acquisition costs and the published list prices for generic drugs.Once again, we learn just how flawed Medicaid’s existing Federal Upper Limit (FUL) computations have been for pharmacy reimbursement. The evidence of generic mega-spreads at retail pharmacies also provides a counterpoint to pharmacy owner complaints about Maximum Allowable Cost (MAC) programs and the redefinition of Medicaid’s Federal Upper Limit (FUL).
THE WHO
Judge Patti Saris, who is very familiar to regular readers of Drug Channels, issued her latest ruling last Wednesday for In Re: Pharmaceutical Industry Average Wholesale Price Litigation, MDL No. 1456, U.S. District Court, District of Massachusetts (Boston). Click here to download the 36-page ruling.
Here’s a sampling of the maximum spreads between WAC and acquisition cost cited in the decision:
- Sandoz: 59,936%
- Mylan: 33,641%
- Par: 13,486%
- Watson: 5,775%
- Day: 3,998%
- Teva: 2,955%
- Barr: 1,841%
“As such, even viewing the facts in the light most favorable to the Defendants, and drawing all reasonable inferences in their favor, the Defendants knew that the list prices they reported were fictitious list prices.” (page 19)SAME AS THE OLD BOSS
Judge Saris' decision omits one important point—manufacturers did not earn these spreads; pharmacies did.
The spreads above reflect potential profits earned by pharmacies dispensing generic drugs and being reimbursed based on the generic drug’s list price. In fact, the period covered by this case (1997-2003) just so happens to be the era when retail pharmacies were earning $32 in spread from dispensing a generic drug in the Medicaid program versus a comparatively paltry $14 in spread from a brand. See for yourself.
Inflated list prices for generic drugs also make a mockery of the current Federal Upper Limit (FUL) computation since list prices such as AWP or WAC are such poor proxies of a pharmacy’s acquisition cost for a generic drug. Each manufacturer of a generic drug makes an identical version of the drug and then establishes its own list price for a particular strength and dosage of a generic drug. These prices can vary widely for an identical product.
See the problem? An individual pharmacy could earn a higher profit by dispensing the generic drug made by a manufacturer with a higher list price.
The FUL eliminates this crass loophole by establishing the maximum amount that a state Medicaid agency can reimburse a pharmacy based on the lowest list price for a particular multiple source (generic) drug.
The shortest giant can still be pretty tall, so generic mega-spreads can persist.
MEET THE NEW BOSS
To prevent pharmacies from earning extraordinary profits from dispensing generic drugs, payers today either (a) establish deep discounts versus AWP for generic drug reimbursement or (b) use Maximum Allowable Cost (MAC) methods, which set a unit price limit on pharmacy reimbursement.
A MAC list creates a standard reimbursement amount for identical products, regardless of the manufacturer’s list price. And to the obvious displeasure of pharmacy owners, MAC lists prevent pharmacies from earning extraordinary mega-profits from dispensing generic drugs.
State Medicaid programs were slow to adopt these techniques. Ten years ago, only half of all state Medicaid programs had even bothered to establish a state MAC list for generic drugs. Today, 45 state Medicaid programs use MAC lists (source)—a greater percentage than the 7 out of 10 private employer prescriptions drug plans using MAC pricing for retail generic prescriptions. (source)
Redefining the Medicaid FUL to reflect actual pharmacy acquisition costs also makes sense when you consider the excesses of the prior era. The Deficit Reduction Act of 2005 (DRA) requires CMS to establish the FUL for multiple source drugs using the Average Manufacturer Price (AMP), a computed transactional price that (per regulations) “equals the average price received by the manufacturer for the drugs from wholesalers for drugs distributed to the retail pharmacy class of trade.” CMS is currently enjoined from using AMP for pharmacy reimbursement.
THE CHANGE IT HAS TO COME
It’s useful to keep these economic realities in mind when you hear pharmacy owners complaining to Congress about MAC lists or suing CMS to prevent a redefinition of FUL. I believe that pharmacies should receive a reasonable—but not excessive—profit to run their businesses and retain incentives to promote generic use.
The pharmacy lobbyists have now accepted the reality of cost-plus pharmacy reimbursement, which is why the reform debate has shifted to arguments over “AMP + what %” instead of “FUL or bust!” See Fixing AMP: A Post-Brown Analysis.
In the meantime, expect the NCPA and NACDS to get on their knees and pray ... they don’t get FULed again.
