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Paying for Prescribed Drugs in Medicaid: Current Policy and Upcoming Changes

Changes in Reimbursement Policy

Calls to Revise Drug Ingredient Cost Methodology

In the early 1990s, the Health Care Financing Administration1 pressured states to improve their estimates of acquisition costs based on evidence that AWP was higher than pharmacies’ actual costs of acquiring drugs from a wholesaler or manufacturer.2 Over the next two decades, federal investigations continued to show that AWP-based payments exceeded pharmacies’ acquisition costs, despite states’ efforts to bring reimbursement in line with costs.3,4,5,6Regardless, until recently, the majority of states used AWP to determine reimbursement amounts; for example, at the end of 2010, 34 states still based their EAC on AWP.7

In 2009, First DataBank and Medi-Span, publishers of the most widely used drug price compendia, settled lawsuits that alleged they had inflated AWPs to benefit pharmacies and wholesalers with higher payments, at the expense of purchasers (including state and federal governments). These lawsuits supported claims that AWP does not reflect actual transaction cost and confirmed suspicions that it may be subject to manipulation. In 2009, First DataBank announced they would cease publishing AWPs within two years. Medi-Span made a similar announcement at that time, but later reversed the decision, and as a result, they continue to publish AWPs today. However, the announcements that widely used sources would no longer list AWP, combined with the attention to the subject resulting from and abundance of studies and litigation on the topic caused many states and industry groups to discuss alternatives to the AWP. WAC seems to suffer much criticism because of its close relationship to AWP. However, there is evidence that WAC is actually a relatively accurate pricing measure for many single-source drugs (brand-name medications with market exclusivity) but it is less accurate, if even reported, for many multiple-source drugs (generic versions of brand-name drugs).8

The Move to AAC

In this atmosphere, and in direct response to the OIG’s extensive research on the actual acquisition cost and AWP, in February 2012, CMS issued proposed rules that would require states to pay pharmacies based on actual acquisition cost (AAC) plus a “professional” dispensing fee, instead of the current EAC plus a reasonable dispensing fee.9 In the proposed rule,CMS defines AAC as the state Medicaid agency’s determination of pharmacy providers’ actual prices paid to acquire drug products marketed or sold by a specific manufacturer. To determine AAC, CMS suggests in the proposed rule that states may survey pharmacies, as is currently done by every state using AAC-based reimbursement, or use the AMP data that manufacturers already are required to report to enable calculations of federal rebates and FUL pricing. The Office of Management and Budget has indicated the final rule is scheduled to come out in mid-2014.10

A 2011 survey by the Department of Health and Human Services’ Office of the Inspector General (OIG) found that most states want CMS to create a national benchmark for Medicaid reimbursement of prescription drugs.11 The proposed rule from February 2012 also mentioned that a national survey could be used to develop an AAC metric. To this end, CMS contracts with a public accounting firm to perform a survey of invoices from independent and chain retail pharmacies, which it uses to calculate National Average Drug Acquisition Costs (NADAC) values.12 CMS began to post draft NADAC data to a public website in October 2012. Effective November 27, 2013, CMS is posting final NADAC data, updated on a weekly and monthly basis.13 CMS views these data as a way of providing Medicaid agencies with information concerning acquisition costs, which state agencies can use to compare pricing methodologies and payments. If a state agency chooses to use NADAC as its metric to determine reimbursement, it would have to submit a state plan amendment to CMS for approval.

Commercial entities have also developed alternative measures to estimate actual acquisition costs. For example, Elsevier/Gold Standard, a drug database and drug reference provider, promotes use of a new pricing metric it calls Predictive Acquisition Cost (PAC). This metric comes from a predictive analytic model that estimates drug acquisition cost based on factors such as industry maximum allowable cost benchmarks, published prices, existing price benchmarks, drug dispensation metrics, supply-demand measures, and survey-based acquisition costs.14

Current Reimbursement Policy Comparing Pricing Under Different Measures

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Filling the need for trusted information on national health issues, the Kaiser Family Foundation is a nonprofit organization based in Menlo Park, California.