Pharmacy braces for Medicaid cutbacks in 2007

October 9, 2006

A new era is coming for the Medicaid program-one that will spare the state and federal governments from overpaying for drugs and provide more pricing transparency to all parties involved.

"It will be a new day in drug pricing" for the Medicaid program, proclaimed Dierdre Duzor of the Centers for Medicare & Medicaid Services. Duzor spoke at the National Association of Chain Drug Stores Pharmacy and Technology Conference in San Diego last month.

Believing that Medicaid has been paying too much for drugs under the average wholesale price approach, Congress passed the Deficit Reduction Act (DRA), which will switch the basis for calculating federal upper limits (FULs) on generic drugs to average manufacturers price (AMP) starting January 2007. Until now, AMP has been the basis for calculating rebates paid by manufacturers to the states for Medicaid drugs.

Other provisions of the DRA will open up drug pricing for all to see. Congress has charged CMS to survey retail drug prices on a monthly basis and to post the information on a public Web site, Duzor told the audience. In addition, states must annually report to CMS their payment rates for their 50 most widely prescribed drugs, their dispensing fees, and their utilization rates for generic drugs. CMS will then have to annually rank the states on their drug payment rates and submit this information to Congress. Duzor said ranking the states is not easy to do and is not something CMS relishes doing.

To help CMS collect retail prices on a monthly basis, the feds will be selecting a contractor shortly, Duzor revealed. The contractor will also be responsible for alerting CMS when a new drug subject to FUL enters the marketplace. This is something CMS sorely needs since it has been criticized for not creating FUL groups or updating FUL prices promptly enough, Duzor explained.

So how does pharmacy feel about these DRA provisions? According to John Coster, VP of policy and programs at NACDS, they are "very alarming to us," since AMP is 40% lower than wholesale acquisition cost for generic drugs. What's more, AMP might not be limited to use with generic drugs only; states may use AMP to set brand-drug reimbursement rates and private payers may apply AMP to their plans as well down the line, Coster warned.

To fight back, NACDS will work at the state level to increase states' dispensing fees to compensate for the losses in generic drug payments. But this will entail mounting a battle in every state-a tall order. Coster added that to arm itself with data, NACDS is conducting a study on what it costs to dispense drugs these days and plans to have the results out later this year.

Medicaid timeline raises questions

The Deficit Reduction Act requires the federal upper limits (FULs) on generic drugs to be based on average manufacturers price (AMP) starting on Jan. 1, 2007. It also calls for CMS to promulgate regulations on the definition of AMP by July 1, 2007.

Since publishing regulations and putting them out for public comment for 60 days involve time-and the feds have not published these rules yet-CMS official Deirdre Duzor acknowledged that it's unlikely the final rules will be ready in time for the January implementation date.

She pointed out, though, that even if the rules are not finalized by January, Congress has charged CMS with using AMP as the benchmark for FULs beginning next year.