Last month, I read a curious press release from NACDS titled Major Victory for Patients and Pharmacy in South Carolina. It describes the "monumental achievement" of switching the pharmacy's ingredient cost reimbursement in the state's Medicaid program from Average Wholesale Price (AWP) minus 10% to Wholesale Acquisition Cost (WAC) plus 12.5%Don't be fooled. This really is nothing more than a victory of politics over economics. Moving to WAC+12.5% means that South Carolina’s Medicaid program will now pay far more than other states for its drugs even though pharmacy costs are no higher.
Anyone concerned about the cost of health care should be very anxious about this “victory.” I conservatively estimate that this change will cost the South Carolina Medicaid program almost $10 million per year. Expand this victory to the other 49 states and we’ll add half a billion dollars to Medicaid costs even as states feel tapped out.
Better keep your hand on your wallet. The Patient Protection and Affordable Care Act will increase Medicaid enrollment by 30%. (See Health Reform: Impact on Drug Channels.)
While health care reform may not have bent the cost curve, we certainly seem to be on the road to unbending the pharmacy profit curve.
THE BIG BOOST
Perhaps you think I am being overly harsh. Well, an ounce of data is worth a pound of opinions.
The chart below shows a retail pharmacy’s total reimbursement for dispensing a brand-name drug to a Medicaid beneficiary. (I assume an AWP of $170 and a 1.20 WAC-to-AWP markup.) I computed these figures using CMS’ Medicaid Prescription Reimbursement Information by State - Quarter Ending March 2010.
Under the new formula, South Carolina pharmacies will now get an extra six bucks for a typical Medicaid prescription—more than any neighboring state. Does anyone know why a South Carolina pharmacy needs to earn $18 more per script than a Florida pharmacy?If we make some conservative assumptions about pharmacy acquisition costs, then this seemingly small change in reimbursement translates into a big jump in gross profits per script. On average, a South Caroline pharmacy will earn about $26 in gross profits for each Medicaid prescription—a 30% boost in gross profits despite no offsetting increase in dispensing costs.
BUT WHY?
I get it. The change in the benchmark mathematically removes the effect of the AWP rollback because [WAC+12.5%] = [(WAC*1.25)-10%].
But I have trouble figuring out why exactly South Carolina pharmacies deserve so much more than everyone else. Here are three plausible but invalid explanations:
More independents? Nope. According to The 2009-10 NACDS Chain Pharmacy Profile (page 13), independent pharmacies are 30% of the pharmacy outlets in South Carolina—the same percentage as the national average.
Higher Cost of Dispensing? Wrong again. According to a Cost of Dispensing (COD) Study (page 30-31) funded by NCPA and NACDS, the average “Medicaid COD per Prescription” for South Carolina was $9.40. For comparison, the national average was $10.51 per prescription and the average of the eight neighboring states was $9.68 per prescription. See the table below.
Higher Pharmacist Salaries? Strike three! According to The U.S. Bureau of Labor Statistics, average annual pharmacist salaries in South Carolina were a healthy in $108,030 in 2009. (Sweet.) South Carolina salaries are on par with neighboring states and slightly above the national average salary of $106,630. See the table below.
ONE EXPLANATION?While there is no logical cost-based explanation for the extra cash, there is a perfectly plausible explanation drawn from the political decision-making process.
Consider the following extract from the Wikipedia entry on Public Choice theory:
“[T]here may be many advocacy groups that have strong incentives for lobbying the government to implement specific inefficient policies that would benefit them at the expense of the general public ... The costs of such inefficient policy are dispersed over all citizens, and therefore unnoticeable to each individual. On the other hand, the benefits are shared by a small special-interest group with a strong incentive to perpetuate the policy by further lobbying.”‘nuff said.
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For more on South Carolina’s dubious political history, see What's Going On In South Carolina? from always amusing The Onion.
