New Study Finds Small AMP Impact, But Trouble in Six States

Regular readers know the unofficial motto of Drug Channels: "Everyone is entitled to their own opinion, but not their own facts."

Last Thursday, I posited that the forthcoming Average Manufacturer Price (AMP)-based Federal Upper Limits (FULs) for Medicaid reimbursement of multisource (generic) drugs would have only a moderate impact on the pharmacy industry’s profits. See What’s Happening with AMP and Pharmacy Profits.

I'm now pleased to bring you the results of a new study that confirms my opinions with actual facts. Ricky Goldwasser and her colleagues at Morgan Stanley conducted a valuable and original analysis computing how the new AMP-based FULs will affect pharmacy profits. Their methodology is much more rigorous and quantitative than my more informal explanation, but the conclusion is the same: "New AMP based reimbursement for generic drugs will have only limited impact on supply chain participants."

The Morgan Stanley research also makes an important contribution by showing that the impact of the new AMP-based FULs will vary based on geography. As the chart below shows, AMP-based FULs will be a non-event in most states, but pharmacies will face a painful adjustment in six key states that still rely on inflated FULs. Pharmacies in California and Connecticut will be hit the hardest.

When the facts change, I change my mind. What will the pharmacy industry's lobbyists do?

HONEY, I SHRUNK THE IMPACT

While I can’t share the entire Morgan Stanley report with you, the chart below summarizes the projected impact by state. Fascinating. (Click the chart to enlarge it.)

The chart makes it clear that many state Medicaid programs have already clamped down on excessive pharmacy reimbursement using their own State Maximum Allowable Cost (SMAC) lists. The new AMP-based FULs will be at or below these SMACs.

I’m amazed to see that some state Medicaid programs continue to over-reimburse pharmacies for generic drugs. Pharmacies in six states—Connecticut, California, Colorado, Texas, Arkansas, and Vermont—will see the biggest hit to profits as Medicaid reimbursements adjust to reality.

Budget-strapped California apparently finds itself on this list because of a pending lawsuit. As a result, the average pharmacy reimbursement in California for a generic drug in Medicaid is almost three times greater than the State of Michigan. Good thing California doesn't have any fiscal problems!

HONEY, I BLEW UP THE MARK UP?

Section 2503 (Providing Adequate Pharmacy Reimbursement) of the Patient Protection and Affordable Care Act (PPACA) states that the new FULs have a mark-up “no less than 175 percent.”

Hmmm, I can think of many numbers not less than 175 percent. CMS has been irritatingly vague about its plans, but here’s one scenario:

• The Deficit Reduction Act of 2005 (DRA) stated that FUL amounts for most multiple-source drugs are to be based on 250 percent of the lowest reported AMP.
• CMS issued a Final Rule in July 2007 to implement the provisions of the DRA.
• The Final Rule issued last week withdrew provisions of the DRA that had been superseded by the PPACA—but did NOT withdraw the 250 percent figure.

Could CMS be planning to use 250 percent because Congress had previously established that rate and it exists in current regulations? If so, the impact on the pharmacy industry would shrink even more than the chart above indicates.

Of course, CMS’ bizarre reluctance to clarify major details just increases the likelihood of another lawsuit from the pharmacy industry. You can see the legal strategy in the infamous Secret AMP Letter sent by NACDS and NCPA to CMS. As a result, I’m still not convinced that the new AMP-based FULs will be published on time.

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Special thanks to Ricky Goldwasser and her team for conducting this study and for letting me share the results with you.