Paying Pharmacies Honest Prices for Prescription Drugs – Say Ahhh! A Children’s Health Policy Blog

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As policymakers across the country look to balance their
budgets, some are turning to Medicaid, recycling the same harmful policies
they’ve used year-after-year: eliminating coverage for vulnerable Americans,
restricting critical benefits like prescription drug coverage, imposing
premiums on those who can’t afford them, and slashing already-low provider reimbursement

Community Catalyst and Georgetown University Health
Policy Institute Center for Children and Families created the States of
Innovation blog series to shine a spotlight on states that are trying to find a
better way. We will highlight states that are pioneering new approaches to
making Medicaid more sustainable without harming – and often by improving –
care for the millions of vulnerable seniors, people with disabilities, children
and low-income parents that rely on Medicaid.


By Marcia Hams, Community Catalyst

The state of Alabama has pioneered a way to save millions
of dollars in its Medicaid program by changing how it pays pharmacies for the
drugs they provide to Medicaid patients. 

Like 40 other states, Alabama used to reimburse
pharmacies based on a pricing benchmark generated by prescription drug
manufacturers, called Average Wholesale Price (AWP). 

But documents made public in court cases have shown that
drug manufacturers and others sometimes inflate their AWP list prices to
incentivize pharmacies to buy their drugs. The manufacturers actually charge
the pharmacy less than the published list price that Medicaid uses to reimburse
the pharmacy for the drugs. For example, in Massachusetts from 1995 to 2003 the
drug maker Warrick reported widely inflated list prices for an albuterol drug
that was nearly seven-times the actual sales price. The pharmacies often reap a
profit from this price “spread.”  

Use of inaccurate, sometimes almost fictional list prices
like AWP has led not only to overpayment but to outright fraud when companies
lure pharmacies into favoring their products over competitors by increasing the
profit margin.  As a result of
litigation on such pricing fraud, the main publisher of the AWP list (First
Databank) ceased publishing it in September, 2011. However, this list price
continues to be published by others, and as of now, 40 states and many private
health plans continue to use this or other manufacturer generated list

Alabama paves the way for a fairer – and more
cost-effective – system

Alabama recently began reimbursing pharmacies based on an
“evidence-based” benchmark, called Average Acquisition Cost (AAC.) It is based
on an ongoing average of actual invoices of pharmacy purchases from drug
manufacturers and wholesalers, which best reveals the actual cost of the drugs
to the purchasing pharmacies. A dispensing fee is also paid to the pharmacy to cover
the cost of pharmacist services and overhead.

Alabama’s Medicaid program has projected a 6.1 percent
savings on its fee-for-service drug expenditures — that amounts to $30 million
in the first year –without affecting prescription drug benefits provided to
Medicaid beneficiaries or impacting quality of care. Indeed, the president of
the Medical Society of the State of Alabama affirmed that changing to AAC
should not affect patients’ access to care.

Three other states have followed Alabama’s lead: Oregon
has implemented AAC pricing and expects to save $1.6 million, or 1 percent of
its $160 million fee-for-service Medicaid drug expenditures. Idaho is in the
process of implementing AAC, and expects to save $2 million in state general
funds. And California has authorized a shift to AAC pricing as well.

CMS itself has also begun collecting drug cost data from
pharmacy invoices nationally in order to assist states in evaluating their
current payments systems. If CMS shares such information, it could help reduce
the implementation costs to states, since they may not have to collect their
own invoice data. 

Private sector benefit

Alabama’s drug price information is available online here, and Oregon’s is published here.
By making these regularly audited drug prices available to the public, these
states and CMS can also make it easier for private insurance plans to adopt AAC
and reduce their costs. Private plans will also be selling their products
through the Affordable Care Act mandated Exchanges, often to low-income people
not eligible for Medicaid or employer coverage. Since lowering pharmaceutical
costs could help play a role in controlling premium costs, this would be of
particular benefit to these low-income purchasers, and to the government, which
will pay a sliding scale percentage of their premiums. 

Pharmacy resistance

Some pharmacies have fought AAC pricing, claiming they
cannot survive without the “spread” between what they paid for the drug and
what they’re reimbursed from Medicaid. However, as court documents have
revealed, many have been overpaid for years in a system with no transparency.
If pharmacies were transparent about their actual cost of doing business–something
they typically resist–and they could prove actual losses, the per-prescription
dispensing fee Medicaid pays could be increased to cover those costs. 

To find out more, see the AAC section of Community
Catalyst’s new Medicaid Report Card.  

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