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

Policy Implications

FY 2015 HHS Budget

The federal government is making efforts to provide more transparent Medicaid drug pricing data, with Health and Human Services proposing to “increase access to and transparency of Medicaid drug pricing data” in its 2015 budget.1 HHS specifically proposes funding a nationwide survey of pharmacy drug prices to consumers, and collecting wholesale acquisition costs for all Medicaid-covered drugs. These proposals come amongst many to reform Medicaid outpatient drug reimbursement in the 2015 HHS budget.

State AAC Initiatives

State Medicaid programs use a variety of benchmarks to determine their reimbursements to pharmacies for prescribed drugs. Due to concerns about the accuracy and availability of commercially available benchmarks such as AWP, many states have changed the methods they use to determine reimbursement in recent years and more continue to explore new options. As of December 2013, Alabama, Colorado, Idaho, Iowa, Louisiana, and Oregon all use surveys of pharmacy invoices in an effort to bring more transparency to drug acquisition costs, as does CMS’s NADAC measure.  Five of these states use the same firm, Myers and Stauffer, LC, to conduct the state-wide pharmacy surveys as the federal government does.  Alabama was the leader in implementing these survey-based AACs, having used the AAC model since September 2010.  Oregon implemented the model in January 2011.2

The state AAC and NADAC survey approaches rely on invoices to evaluate the costs that retail pharmacies pay to acquire prescription drugs from manufacturers or wholesalers; these costs do not account for rebates or discounts if they are not included on the invoice. Other states have switched from AWP-based formulas to WAC-based formulas, in part due to studies indicating WAC has a reasonably consistent relationship to invoice prices. State MACs typically determine reimbursements for the most common multiple-source brand-name drugs and generics.

The Relationship Between NADACs, EACs, and Actual Paid Amounts

The OIG’s analyses indicate that AWP, WAC, and AMP all have relatively consistent relationships with invoice prices for brands (including single- and multiple-source brands), but larger and more variable relationships with invoice prices for generic drugs. Our own analysis indicates that actual Medicaid payment amounts to retail pharmacies for prescribed drugs are much closer to WAC and NADAC prices than to AWP, primarily because of complex “lesser of” payment formulae and large percentage reductions from AWP used in EAC calculations. Differences between WAC or NADAC and the actual paid amounts are relatively modest because states have refined their reimbursement schemes over the past several years in response to concerns about excessive payment rates and as a way of controlling cost growth. For generic drugs, differences remain relatively large in percentage terms but are generally modest in terms of actual dollar amounts. Benchmarks and paid amounts vary considerably by drug class, in part due to the mix of brand name and generic medications in each class. It is important to note, however, that our analysis only looks at one point in time.  Further, we were examining NADACs from the first month they were issued. It would be worthwhile to continue looking at these trends using NADACs from other time periods, as well as studying the volatility of NADACs over time.

How Switching to AAC Affects Dispensing Fees

Regardless of whether one believes that any benchmark accurately captures final transaction prices at which retail pharmacies purchase the drugs that they dispense to Medicaid beneficiaries, the right benchmark for acquisition costs still does not resolve the issue of what constitutes “appropriate” reimbursement under Medicaid. Retail pharmacies incur costs to build and maintain infrastructure that is convenient for patients and to employ the staff and technology necessary to safely and accurately dispense medications to patients. To stay in business, the total compensation they receive, including reimbursement for the cost of the drug and the dispensing fee, needs to be sufficient to support ongoing operations profitability. Many states have increased their dispensing fees as they have ratcheted down the acquisition cost component of reimbursement.  In a 2011 Kaiser Family Foundation study of Medicaid pharmacy directors, some stated they would spend more money if they were to base their reimbursements on Alabama AACs, due to the accompanying increased dispensing fee.3 It should be noted that the pharmacy directors made these comments with regard to Alabama AACs, not NADACs. The potential savings from using NADACs or any other AAC measure are dependent on the current and future dispensing fees in each state and the state’s mix of brand and generic prescriptions. Policy-makers should not assume that the prescription trends of the past will remain the same in the future. Further, CMS and numerous experts have expressed the value of basing reimbursement on actual pricing data.4

Specialty Drugs

Concerns over drug costs are increasingly falling outside the purview of traditional pharmacy reimbursement amounts and related benchmarks. Many new drugs and biologics are “specialty” medications, which may be dispensed through specialty pharmacies because of unusual distribution or handling requirements. These products may also require consultation with or monitoring of patients prior to or after administration of the medication, entailing administration by physicians or other health care providers, and coverage through medical benefits. Provider involvement adds a layer of complexity because of the necessary coordination of benefits, payments and rebate collections. Specialty products also tend to be much more expensive than traditional drugs, so accurate reimbursement is important, regardless of whether the state pays for them through pharmacies or through medical providers or health care facilities. With their high costs and rapid growth of utilization, managing specialty drugs will be crucial to limiting state and federal Medicaid expenditures for prescribed drugs in the near future.

This brief was prepared by Brian Bruen from George Washington University and Katherine Young from the Kaiser Family Foundation.

Comparing Pricing Under Different Measures Methods

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