What’s Happening with AMP and Pharmacy Profits!!

The Center for Medicare & Medicaid Services (CMS) just took another baby step toward implementing new Federal Upper Limits (FULs) for pharmacy reimbursement of multi-source (generic) drugs in the Medicaid program. Yesterday, CMS filed a Final Rule implementing its previously proposed withdrawal of now-obsolete provisions related to Average Manufacturer Price (AMP). Click here to read this Final Rule.

It’s really quite extraordinary that CMS takes 39 pages to say almost nothing. CMS dodged most of the key unresolved questions about AMP except to note that a formal rule-making process will occur at an unspecified future date. Gee, thanks.

Meanwhile, the battle over AMP/FUL will continue. The pharmacy industry has spewed so much nonsense out there about AMP that you're right to be confused about the ultimate impact of the new FULs on the industry’s profits from Medicaid prescriptions. But as I explain below, the new FULs will have only a moderate impact on the pharmacy industry’s profits because states have moved faster than CMS. Who woulda thunk it?

CATCHING UP WITH AMP

CMS provides a helpful history of the AMP saga in the Background section (pages 2 to 6) of its latest Final Rule. The end result of this tumult was that the Patient Protection and Affordable Care Act (PPACA) legislatively redefined many items related to AMP and FULs in its Section 2503. Providing Adequate Pharmacy Reimbursement. Just keep in mind that legislation is not the same as actual regulations.

PHARMACY IMPACT

The following two pre-PPACA articles explain why I expect AMP-based FULs to have a moderate impact on the pharmacy industry’s profits:

• Won’t get FULed again
• Fixing AMP: A Post-Brown Analysis

My argument boils down to the following points:

• The impact of AMP-based FULs has been greatly exaggerated by the pharmacy trade associations. Check out of my classic article from 2008: 11,105 Pharmacies Gone?!? Just More AMP Hype.
  
  
• Changes by state Medicaid programs have made the AMP-based FULs much less important to the pharmacy industry. Nearly all state Medicaid programs now use their own State Maximum Allowable Cost (SMAC) lists. Many of these SMAC amounts are far below current FULs and will probably be comparable to the AMP-based FULs. States such as Alabama and Oregon are going farther and establishing cost-plus pharmacy reimbursements models. See CMS Approves Alabama’s Cost-Plus Plan.
  
  
• Medicaid reimbursement for generic drugs will probably approximate other third-party payers. A little-read 2009 OIG study documents that FULs computed with the pre-PPACA AMPs are comparable to Part D MAC lists. Keep in mind that the AMPs computed using the PPACA rules will now be higher than the old AMPs used in this study.

Fresh evidence comes from the new 2010 NCPA Digest. In previous years, state Medicaid programs have consistently been the most profitable third-party payers for independent pharmacies. See the chart in Why do pharmacy owners care about PBM transparency? for the 2008 data.

This pattern has now reversed itself. The 2009 survey data, published in the 2010 NCPA Digest, show that private payers provide gross margins to pharmacies that are 90 basis points higher than Medicaid. This is exactly what I have been suggesting would occur. The glory days of excessive Medicaid reimbursement at pharmacies are slowly ending despite occasional oddities such as the South Carolina situation.

WTF, CMS?

Pages 18 to 29 of the Final Rule include CMS’ responses to public comments on “Issues Not Addressed in the Proposed Rule.” These comments raised many intriguing but as-yet-unresolved questions about implementation. Chris Cobourn of CIS has a very thorough analysis of AMP computation complexities on The Pharma Compliance Blog this morning.

CMS’ response to these questions?

“While we appreciate these comments and suggestions, they raise issues that we believe are outside the scope of the proposed rule and will not be addressed in this final rule. CMS does expect to issue proposed regulations addressing the Affordable Care Act provisions.”

Translation: "We’ll get back to you. Good luck with compliance!"

Tune in for the forthcoming sequel titled What's Happening with AMP Now!!

P.S. Hat tip to Dave C. for today's photo!