Changes to AMP & Best Price: Impact on 340B Pricing February 1, 2008 Long Beach, California 4 th Annual 340B Coalition Winter Conference University of Minnesota Stephen W. Schondelmeyer, Pharm.D., Ph.D. Director, PRIME Institute

Overview Medicaid & AMP Deficit Reduction Act: AMP & the Final Rule Deficit Reduction Act: The Preliminary Injunction Impact of DRA & Preliminary Injunction on 340B What will be discussed?

Medicaid & OBRA ’90: Creation of AMP [Average Manufacturer Price]

Medicaid Payment Policy Changes Medicaid & AMP  OBRA ’90 Required Manufacturers to Pay Rebates to Medicaid  Minimum rebate  Best Price rebate  Inflation adjustment rebate  Veterans Health Care Act of 1992  Set Federal Ceiling Price for Big 4  Established 340B Pricing  Based on AMP (Minimum and Best Price)  Federal Ceiling Price  Negotiated Price

Medicaid Rx Expenditures & Rebates: 1990 to 2002 (Current Dollars) Expenditures Total Rx Expenditures SOURCE: Compiled by the PRIME Institute, University of Minnesota from data found in Pharmaceutical Benefits Under State Medical Assistance Programs, National Pharmaceutical Council, 1976 to Total Rx Expenditures - Rebates Rebates $6.2 bil. $0.9 bil. $7.1 bil. $29.3 bil. $5.9 bil. $23.4 bil.

Drug Rebates as a % of Total Drug Expenditures % of Drug Product Cost (AMP) % of Total Drug Expenditures % of Medicaid Drug Expenditures Source: Compiled by the PRIME Institute, University of Minnesota from data found in Pharmaceutical Benefits Under Medical Assistance Programs, National Pharmaceutical Council, 1975 to 1998 and in HCFA Form 64.

Estimated Prices of Selected Public Purchasers (2001) % of AWP SOURCE: Estimated by PRIME Institute, University of Minnesota and reported in Pharmaceutical Discounts Under Federal Law: State Program Opportunities, Public Health Institute, May AMP

Medicaid & the Deficit Reduction Act of 2005

AMP now has 2 roles in Medicaid: Dual Role for AMP Ø Basis for Manufacturer Rebates to Medicaid  Minimum rebate of 15.1% of AMP  Best price rebate  Inflation adjustment payment  State supplemental rebates Ù Basis for Setting FULs for Generics  New FULs to begin mid-2007  Lowest AMP of all generic equivalents x 250%  Updated monthly & posted on web site  Applies to any drug with 2 or more equivalents

Provider/ Pharmacy Medicaid Prescription Payment Gap Patient Wholesaler Manufacturer AMP AAC State Medicaid Program Does AMP = Pharmacy AAC ? Payment Gap (Wholesaler Operation & Margin & other costs) No ! Rebates

AMP as a % Independent Invoice Acquisition Cost (CBO, January 2007) % of Acquisition Cost SOURCE: Independent invoice acquisition cost based on IMS invoice data from CBO January AMP Range 2% to 10% Below Actual Cost AMP Range 2% to 27% Below Actual Cost AMP Range 8% to 61% Below Actual Cost

FULs set as 250% above the lowest AMP are: GAO Study of AMP (December 22, 2006)  Below Average Retail Acquisition Cost  65% Below for Highest Spend Generics  15% Below for Most Prescribed Generics  28% Below for Most Prescribed & High Use Drugs  59 of 77 Generics Studied  AMP-based FULs was below average retail pharmacy acquisition cost

AMP Final Rule

The CMS Final Rule: The Final Rule for AMP  Proposed Rule published (Dec. 2006)  Final Rule published (July 2007)  AMP Regulation Takes Effect (Oct 2007)  Lawsuit Filed by NACDS / NCPA (Nov 2007)  CMS to Report AMP to States & Website (Jan 2008)

AMP as defined in the CMS Final Rule Winners & Losers with AMP  The Final Rule AMP benefits:  Manufacturers with less rebate liability  340B with lower AMP from broad definition of retail  The Final Rule hurts:  Medicaid program with less rebates  Traditional retail pharmacy with AMP-based FULs (payment below acquisition cost in many cases)  340B rebates lower due to exclusion of wholesaler prompt pay discounts

Proposed Rule Expected Impact Includes: CMS Proposed Rule on AMP (December 22, 2006)  Savings from Use of AMP to Set FULs  $800 million in savings in 2007  $8.04 billion in savings over 5 years  90% of savings would come from pharmacy  Pharmacies Will Feel the Impact  18,000 pharmacies will be significantly impacted  350 pharmacies in Minnesota will have significant impact  High Medicaid pharmacies will be affected most  Rural & Low-income area pharmacies will be hit

The Lawsuit & Preliminary Injunction

Preliminary Injunction Alleges CMS Final Rule: The Lawsuit Alleges:  Violates Admin. Procedure Act  Definition of Retail Class of Trade Violates Statute  Definition of Wholesaler Violates Statute  Prices in Each State, Not “United States” to be Considered  FUL Used for Non-equivalent Multiple Source Drugs

Overly broad & self-styled CMS definitions: The CMS Final Rule:  Firms not licensed as wholesalers are wholesalers  Firms not licensed as pharmacies are pharmacies  Physicians, clinics, hospital outpatient, & home infusion are called “retail pharmacies”  Manufacturers are wholesalers & retail pharmacies  Consumers are wholesalers & retail pharmacies

Exhibit 3C. Pharmaceutical Market Structure: Distinct Market Segments & Classes of Trade Chain Pharmacy Mass Merchant Pharmacy Food & Drug Pharmacy Independent Pharmacy Mail Order Pharmacy Health Plan Pharmacy Clinic & Drs’ Office Long Term Care Pharmacy Hospital Government Facilities & Other Chain Warehouse Regional Wholesalers National Wholesalers Drug Manufacturers & Marketers Retail Pharmacy Mail Pharmacy Outpatient Providers Wholesalers Institutional Providers Manufacturers, Marketers, & Distributors

Exhibit 3D. Pharmaceutical Market Structure: Wholesalers Chain Pharmacy Mass Merchant Pharmacy Food & Drug Pharmacy Independent Pharmacy Mail Order Pharmacy Health Plan Pharmacy Clinic & Drs’ Office Long Term Care Pharmacy Hospital Government Facilities & Other Chain Warehouse Regional Wholesalers National Wholesalers Drug Manufacturers & Marketers Hospital Outpatient Manufacturer Direct Sales, Pt. Assistance, Coupons, & Vouchers Non-Profit Entities Wholesalers

Exhibit 3E. CMS Final Rule: Wholesalers Chain Pharmacy Mass Merchant Pharmacy Food & Drug Pharmacy Independent Pharmacy Mail Order Pharmacy Health Plan Pharmacy Clinic & Drs’ Office Long Term Care Pharmacy Hospital Government Facilities & Other Chain Warehouse Regional Wholesalers National Wholesalers Drug Manufacturers & Marketers Hospital Outpatient Manufacturer Direct Sales, Pt. Assistance, Coupons, & Vouchers Non-Profit Entities Wholesalers

Exhibit 3F. Pharmaceutical Market Structure: Retail Pharmacy Class of Trade Chain Pharmacy Mass Merchant Pharmacy Food & Drug Pharmacy Independent Pharmacy Mail Order Pharmacy Health Plan Pharmacy Clinic & Drs’ Office Long Term Care Pharmacy Hospital Government Facilities & Other Chain Warehouse Regional Wholesalers National Wholesalers Drug Manufacturers & Marketers Hospital Outpatient Manufacturer Direct Sales, Pt. Assistance, Coupons, & Vouchers Non-Profit Entities Retail Pharmacy Class of Trade

Exhibit 3G. CMS Final Rule: Retail Pharmacy Class of Trade Chain Pharmacy Mass Merchant Pharmacy Food & Drug Pharmacy Independent Pharmacy Mail Order Pharmacy Health Plan Pharmacy Clinic & Drs’ Office Long Term Care Pharmacy Hospital Government Facilities & Other Chain Warehouse Regional Wholesalers National Wholesalers Drug Manufacturers & Marketers Hospital Outpatient Manufacturer Direct Sales, Pt. Assistance, Coupons, & Vouchers Non-Profit Entities Retail Pharmacy Class of Trade Retail Pharmacy by Final Rule Definition

Preliminary Injunction Order by Judge R. C. Lamberth “Unless enjoined plaintiffs are likely to suffer irreparable harm for which no adequate remedy exists in law” “Plaintiffs are likely to succeed on the merits”

CMS is enjoined from: Preliminary Injunction Order by Judge R. C. Lamberth “does not provide the ambiguity for the wholesale re-writing of the words by the Agency” “statute is clear enough” “any and all action to implement the AMP rule to the extent such action affects Medicaid reimbursement rates for retail pharmacies” “Posting AMP on a public website or... to states” wholesale

What Can We Expect?

 May have settlement of legislative intervention  Without above the lawsuit will proceed to trial  CMS may implement other aspects of DRA & AMP  Manufacturers will continue to report AMP  AMP may be implemented for 340B pricing purposes In the Next Year:

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