Understanding the Medicaid Provisions of the DRA: Impact on Retail Pharmacy Reimbursement John M. Coster, Ph.D., R.Ph. Vice President, Policy and Programs National Association of Chain Drug Stores (NACDS) June 13, 2007

Community Retail Pharmacy About 53,000 community retail pharmacies in United States 95% US population within 5 miles of a pharmacy About 11 percent of all prescriptions filled are Medicaid prescriptions can be greater than 50% Operate on net 2 percent profit margins

How do drugs get to a patient? …pharmacies get paid? …states get rebates?

Medicaid payment to pharmacies for prescriptions + = Drug Reimbursement Brand Name Drugs (e.g. Lipitor, Zocor, etc): Most states base payment on Average Wholesale Price (AWP) (e.g., AWP-16%). Generic Drugs (e.g. Simvistatin, generic Zocor): Medicaid establishes a maximum amount or cap (Federal Upper Limit, known as FUL) that the Federal government will pay a state for a particular generic drug. Dispensing Fee Dispensing fee pays pharmacies for operational costs such as salaries, rent, utilities, computers, bottles, labels, etc. Medicaid pays pharmacies a fee to dispense each prescription. Average pharmacy cost to dispense about $10.50 per prescription*. Current average Medicaid dispensing fee is about $4.25 per prescription. Some states pay pharmacies higher fees for generics than brands. *-Grant-Thornton Study, January 2007

Medicaid Utilization and Spending for Brands and Generics Generics account for over half of all Medicaid prescriptions, but only about one-sixth of Medicaid drug reimbursements. Source: CMS Drug Utilization Data, 2003 and NACDS Economics Department.

Generic Drugs Cost Medicaid Programs Less than Brand Name Drugs Average generic reimbursement is 1/6 the average amount for patented brand name drugs. SOURCE: NACDS, based on Medicaid drug utilization data from CMS.

Highest/Lowest Medicaid Generic Dispensing Rates As much as $3.5 billion per year might be saved if all Medicaid programs increased generic dispensing rates to 60.5 percent Source: NDC Health (data for 1st quarter of 2005)

What Does the DRA Do? DRA = Deficit Reduction Act of 2005 (P.L. 107-191) Signed by President February 8, 2006 Significantly lowers the amount of money the Federal Medicaid program will pay states to reimburse pharmacists for generic drugs. Supposed to start January 2007- FUL calculated based on 250% lowest AMP rather than 150% lowest published price – not yet implemented States cannot exceed these payments in the aggregate for about 600+ generic drugs. As a result, States will likely in turn reduce the amount paid to pharmacy for the generic drug ingredient cost. Changes number of multiple source products from three to two to set a FUL. Provides “AMP” data to states and on a quarterly-updated public website Starts July, 2006 (but delayed until ?)

Proposed AMP/FUL Regulation CMS published regulation on December 22, 2006 60 day comment period (due February 22, 2007) What does the regulation do? Defines AMP –finally! Defines how CMS will set FULs for generics Implements other pricing sections of DRA (nominal pricing, manufacturer reporting of AMPs, etc.) Estimates $8.5 billion total savings 2007-11 $8 billion new FULs on generics $179 million rebates physician-administered drugs $229 authorized generics in “best price” for Medicaid No estimate from state use of AMP for single source drugs

Economic Impact of Medicaid Reform CMS: DRA reduces retail pharmacy Medicaid generic payments by $8 billion over next 5 years (2007-2011). What does this mean for average generic payment to pharmacies? NACDS Analysis: Average generic payment in 2007 will decrease by 17% - from about $25 to $21. Payments for generics with three sources of supply could be reduced by as much as 70%. Approx. $4 / script Payments for generics with two sources of supply could be reduced by as much as 30%. Approx. $6 / script

Estimated Average Payment to a Pharmacy for a Generic Prescription Under Medicaid in 2007 Average generic reimbursement is projected to drop by about $5.30 under the new federal limits. SOURCE: NACDS

What is proposed definition of AMP? AMP is defined as the average price received by the manufacturer for a drug distributed to the retail pharmacy class of trade, determined without regard to customary prompt pay discounts extended to wholesalers Wholesalers include a pharmacy, chain of pharmacies, or PBMs. The retail pharmacy class of trade is defined as independent pharmacies, chain pharmacies, mail order pharmacies, PBMs, and other outlets that purchase or arrange for the purchase of drugs from a manufacturer or wholesaler, and subsequently sells those drugs to the general public, including all price concessions related to such goods and services. Will this result in an AMP that approximates retail pharmacy’s acquisition costs? What about time lag? What about how discounts and rebates are reported?

AMP as Inappropriately Calculated – Retail and Non Retail Pharmacy Purchasers (Brand Name Drug) *does not include back end rebates these entities might receive that may further lower ultimate price paid. 1.00+0.96+0.94+0.88+0.76 = 0.91 AMP = 5 Source: Based on CBO Report, “Prescription Drug Pricing in the Private Sector, January 2007”

What’s proposed to be in/out of AMP? Sales, rebates, discounts or price concessions to be included in the AMP calculation include, among others: discounts, rebates or other price concessions to PBMs associated with sales to the retail pharmacy class of trade (to the extent that they do not qualify as bona fide service fees and adjust the prices actually realized by the manufacturer) CMS : “…do not know what part if any of the PBM discount the entity passes on to pharmacies.” By excluding these PBM rebates from the calculation of AMP, CMS contends, it could artificially inflate AMP.” sales and discounts to mail order pharmacies sales to outpatient clinics sales to outpatient hospital pharmacies Sales, rebates and discounts excluded from AMP include, among others: long term care facilities bona fide service fees customary prompt pay discounts extended to wholesalers returned goods

Other AMP Issues CMS indicates that it has included PBM rebates in the calculation of AMP because “…they do not know what part if any of the PBM discount the entity passes on to pharmacies.” By excluding these PBM rebates from the calculation of AMP, CMS contends, it could artificially inflate AMP. CMS does not propose to develop a “smoothing” process for AMP data as they have for the reporting of Part B ASP data. This could cause significant fluctuations in data from month to month. Manufacturers will continue to report AMP data on a quarterly basis (which will be used for rebate purposes) as well as monthly (starting January 1, 2007, which will be used for AMP reporting and FUL purposes). These data are to be reported within 30 days of the end of each quarterly or monthly reporting period.

FULs for generics The proposed regulation sets the FULs for generics at 250% of the LOWEST AMP for a dosage form and strength of a drug using the drug’s 9-digit AMP (weighted across all package sizes), rather than the 11-digit AMP. Statute would appear to give ability to use weighted, average or median AMP CMS will use monthly AMP data to calculate the FUL. CMS has IMPLIED that it will not publish new FULs until they publish the new AMP definition and receive AMP data from manufacturers. Regulation does not indicate how frequently the FULs will be updated by CMS. CMS will determine whether an FUL should be placed on a drug within 7 days of a second multiple source product being available on the market. States can (and likely will) reduce FULs even further under their MAC programs.

FULs for generics CMS will publish a FUL when there are two or more drug products rated as therapeutically and pharmaceutically equivalent AND when TWO suppliers list the drug in national published pricing compendia This is the change made by the DRA which establishes FULs for drugs with only two sources of supply, rather than three sources of supply. How affects authorized generics? CMS will disregard "outlier" AMPs when determining the lowest AMP, which they define as an AMP which is more than 70 percent below the 2nd lowest AMP. (i.e. if the second lowest AMP is $1.00, the lowest AMP would have to be 30 cents or greater for CMS to use it as the basis of the 250% AMP calculation.) Disregarding the lower AMP would not apply when only two products are on the market. No smoothing process like in ASP What about “nationally and widely available” for purchase by retail pharmacies? States are advised that they can use the current Federal Upper Limits (FULs) for generics that are in effect before 1/1/07 until CMS sets new FULs for generics. Thus, this would seem to indicate that states are NOT required to implement their own FULs based on AMP on 1/1/07. CMS indicates, though, that states retain the right to set their own reimbursement limits.

Grassley: States Encouraging Generic Use “CMS should make clear to states that they should reconsider their dispensing fees paid to pharmacies under Medicaid, particularly for generic drugs…” “…states should carefully consider data regarding the cost of dispensing in determining dispensing fees at the same time they change their reimbursements for acquisition cost to be more consistent with the actual cost of acquisition.” Senate Finance Chair Grassley, May 12, 2006

CMS: States Encouraging Generic Use “If states do not maintain the right incentives for generic utilization, any savings will be lost due to higher brand name utilization…CMS guidance encourages states to align incentives for generic utilization and consider paying pharmacies more in dispensing fees to support state savings from greater use of generics.” Dr. Mark McClellan, May 22, 2006.

DRA: Provides Pricing Data to States States started to receive monthly “AMP” data for patented (brand) and off patented (generic) drugs from CMS starting July 1, 2006 AMP currently used by drug manufacturers to calculate rebates paid to states for Medicaid drugs. States told not to release AMP data CMS will also develop quarterly-updated “public” website so consumers and payers can see AMPs for these drugs. Delayed by CMS on May 22, 2006, likely not to see till early next year? Based on monthly data or quarterly data? Each and every NDC? Or weighted average among multiple source drugs Retail Survey Price (RSP) data: forgotten stepchild? IMS contract: provides monthly data to states on “consumer purchase prices for Rx drugs” Includes retail, mail and LTC – at least it did Supposed to represent the “out the door” price to consumers (where AMP is the “in the door price” – in theory)

CMS on Use of AMP Data “We know that an imprecise definition of AMP, especially if publicly posted, will be misleading to state Medicaid directors and others who will use this as a reference point for setting pharmacy reimbursement” Dr. Mark McClellan, May 22nd, 2006

CMS on Use of AMP Data “I am announcing today that CMS will not release the current AMP figures. They are just not the right numbers to use. We do expect to share pricing information with the states…but only for the purposes of setting up their billing systems appropriately, not for the purposes of setting reimbursements.” Mark McClellan, May 22nd, 2006

Grassley on Use of AMP Data “While the AMP data will provide far more accurate reflection of market prices than anything currently available, I believe that purchasers – both the states in Medicaid and those in the private market – should be cautioned that this AMP data does not reflect final calculations and that significant variation could be possible between the first publication and those published under the final regulation” May 12, 2006

Cost of Dispensing Studies CCPA National Cost of Dispensing Study Released January 31, 2007 Average Cost to Dispense a Rx $10.50 weighted by Rx 23,000 retail pharmacies; 832 million prescriptions (3/06-8/06) Sufficient data for 46 state estimations High California: $13.08; low Rhode Island: $8.50 State Studies Studies completed in several states, others ongoing Public results from recent studies: ME (U. of Texas): $10.20 volume-weighted, $11.16 unweighted MN (Myers & Stauffer): $9.59 volume-weighted, $11.25 unweighted ND (PharmAccount): 80th percentile is $11.63 VT (Univ Connecticut): $10.55 average MD: (Univ of Maryland): $11.71 average

2007 State Dispensing Fee Initiatives

Medicaid Reform Timeline Current Regulatory Status July 1: CMS expects to release final regulation? Statutory date for release – but not at OMB yet Met with OMB, seem interested in industry impacts September 1: (two months later): Effective date of regulation? October 30th: Manufacturers first report due for September AMPs? Will CMS use one month’s AMP data for release on public website and setting FULs? Will CMS release a few months AMP data before using for FUL purposes?