On February 1, 2016, the Centers for Medicare & Medicaid Services (CMS) released its Final Rule interpreting the provisions of the 2010 health care reform law that address the Medicaid Drug Rebate Program (MDRP). While much of the Final Rule speaks to drug manufacturer rights and responsibilities in the MDRP, significant portions are directly applicable to chain drug stores.

John Shakow, King & Spalding

Specifically, the Final Rule addresses (a) reimbursement for multisource drugs dispensed to Medicaid patients, (b) changes in the Average Manufacturer Price (AMP) that will impact pharmacy reimbursement for multisource products, (c) reimbursement for single-source drugs dispensed to Medicaid patients and (d) changes to the dispensing fees pharmacies will receive for dispensing drugs to Medicaid ­patients.

An overarching theme expressed in the Final Rule is CMS’ desire to move states away from their historic practice of overpaying for ingredient cost while simultaneously underpaying for dispensing fees.

If the Final Rule plays out as anticipated, in the coming year ingredient cost reimbursement will fall for single- and multiple-source products, but dispensing fees will rise.

This reflects a desired shift away from a “spread-based” model of pharmacy Medicaid participation toward a “service-based” model. It’s currently unclear if the increased fee income to pharmacies will balance the lost reimbursement revenue.

Multisource product ingredient cost reimbursement

Multiple-source drugs (in this context, products with three or more pharmaceutically and therapeutically equivalent nationally available drugs, including innovator products and authorized generics) are now subject to an AMP-based Federal Upper Limit (FUL) reimbursement regime. In order for a state to receive full federal matching funds, it must not pay more for multisource products, in the aggregate, than the aggregate FULs for all reimbursed multisource products.

Therefore, a state may “overpay” for certain drugs or classes of drugs if it wishes, but it must make up the difference by “underpaying” for other multisource products.

The Final Rule (and a July 6, 2016, CMS FAQ document) set out in significant detail how the FULs are now set. FULs are calculated by CMS at the NDC-9 level every month, based on AMPs submitted by Medicaid-participating drug manufacturers. FULs equal the greater of (a) 175% of the weighted average AMP of the products in the A-rated set or (b) an AMP multiplier percentage sufficient to raise the FUL to the National Average Drug Acquisition Cost (NADAC). This accommodation grew out of CMS’ determination that approximately 40% of the FULs set at the 175% rate were lower than the NADACs in the marketplace.

Inhaled, infused, instilled, implanted and injected drugs (5i drugs) that are not generally dispensed to Retail Community Pharmacies (RCPs, a term that includes most chain drug stores) are not included in the calculation of a FUL, nor are drugs that have been terminated from the MDRP.

These new FULs are considerably higher than the previously defined but never put into effect FULs of 2007 (i.e., 150% of the lowest AMP in the group of A-rated products). Readers will recall that in that year NACDS and others successfully blocked CMS from applying AMP-based FULs as then-designed, claiming that lower payments would do them irreparable harm. The Affordable Care Act and its Final Rule address many of the concerns raised by pharmacies in its new AMP-based reimbursement arrangement.

Changes in AMP affecting multisource drug reimbursement

Because AMP is the cornerstone of FUL-based reimbursement, it is important for chain drug stores to appreciate how the ACA and the Final Rule impacted AMP. For all but 5i products not generally dispensed through RCPs (that is, those dispensed through RCPs less than 30% of the time), manufacturer AMPs were increased. This means that AMP-based FULs for multisource products will be greater than they otherwise would be.

The Final Rule acted to increase standard AMP in several ways, including the following:

• First, AMP was reconfigured to include only sales to RCPs, or to wholesalers then resold to RCPs. Purchases made by many discount-receiving entities that would otherwise reduce AMP — mail order, hospitals, clinics, HMOs/MCOs and the like — are omitted from standard AMP.

• Second, manufacturers are permitted to utilize presumed inclusion in setting AMP, which has the effect of including in AMP any WAC sale to a wholesaler for which the manufacturer does not have knowledge that it was resold to a non-RCP. Incidentally, the survival of presumed inclusion will reduce the likelihood that RCPs will be called upon by manufacturers to provide acquisition cost data that would have been necessary under the proposed AMP buildup methodology.

• Third, inclusion in AMP of discounted sales to specialty pharmacies and home health providers was significantly restricted by the Final Rule.

• Fourth, bona fide service fees paid by manufacturers to “any entity” are excluded from AMP, raising AMP.

• Finally, customary prompt-pay discounts to wholesalers are excluded from AMP.

All of these rules act to increase standard AMP and, by extension, pharmacy reimbursement for multisource products.

Single-source product ingredient cost reimbursement

Prior to the Final Rule, single-source and multiple-source products not subject to FULs were reimbursed based on each state’s Estimated Acquisition Cost. The EAC had generally been set at either a discount to Average Wholesale Price or a premium to WAC.

Under the new rules, CMS will require fee-for-service states to reimburse for these drugs based on Actual Acquisition Cost (AAC). Medicaid managed care is not bound by AAC. Estimated to Actual may seem like a semantic distinction, but its implications for pharmacy reimbursement are real.

AAC is defined by CMS to be the “actual price paid by pharmacy providers to acquire drug products.” CMS believes that AAC pricing will be “more reflective of actual prices paid, as opposed to unreliable published compendia pricing.”

States have significant latitude in developing their methodologies to set ACC. States may look to AMP (mindful of the confidential and proprietary nature of AMP), NADAC prices, state ACC surveys and even WAC (when the state has data to confirm its accuracy). NADAC-based reimbursement could particularly benefit pharmacies in that the metric does not include off-invoice discounts, rebates and certain other price concessions. States have until June 30, 2017, to submit amendments to their Medicaid state plans to implement AAC (although if approved by CMS, the AAC approach can be applied retroactively to April 1, 2017).

This shift to AAC presents a lower risk/lower return model for pharmacies than the buy low/sell high business model currently in practice. By removing the opportunities (obligations?) for pharmacies to function in a spread-based environment and increasing dispensing fees, CMS believes it is encouraging a more stable, provider-based approach that will both honor and benefit the role played by pharmacists.

Medicaid pharmacy dispensing fees

CMS made both symbolic and material changes to the way in which states are to compute and pay fees to Medicaid dispensing pharmacies.

The Final Rule replaced the term “dispensing fee” with “professional dispensing fee” to “reinforce [CMS’] position that the dispensing fee should reflect the pharmacist’s professional services and costs to dispense” drugs to Medicaid beneficiaries. CMS clearly wants to remind states that pharmacists are important professionals in the Medicaid system and ought to be recognized as such.

CMS noted that in those states that are not currently using AAC-based reimbursement, dispensing fees languished far below the cost of the pharmacist to dispense ($2 to $3 in some states). This disconnect is one CMS hopes to resolve by simultaneously moving to AAC in all states and requiring states to pay professional dispensing fees more in line with cost (according to some surveys, $10 to $15 per script).

The professional dispensing fee envisioned in the Final Rule (subject to submission and approval of a state plan amendment) would focus on all of the costs incurred in the dispense, including but not limited to the pharmacist’s time, drug utilization review, PDL review, script fill, beneficiary counseling, delivery and overhead. States are encouraged to adopt “transparent, comprehensive and well-designed” cost-of-dispensing studies to include all of these factors (CMS FAQ No. 3, July 6, 2016). States may adopt tiered professional dispensing fees based on the effort involved in the dispense, and have the flexibility to create multiple classes of dispensing costs as justified in their state plans. CMS notably declined to include a specific profit factor in the dispensing fee, “as we believe the components of the dispensing fee we have already identified include a reasonable profit.”

The ACA and CMS’ Final Rule act to reorder the relationship between Medicaid and chain drug stores in fundamental ways. According to CMS, the law and regulations are not designed “necessarily to result in a cost neutral outcome” for Medicaid programs, but to “reflect the pharmacy providers’ actual” costs to acquire and dispense drugs (CMS FAQ No. 4).

Reimbursement will be more closely tied to actual acquisition cost. Professional dispensing fees will be increased to make up for lower ingredient cost reimbursement. Reimbursement for multisource drugs subject to more carefully designed FULs will be based on AMP, which will generally be higher than previously reported.

Time will tell whether these factors, taken together, will benefit or hurt pharmacies, and their impact will differ state by state.

John Shakow is a partner in the FDA & Life Sciences Practice Group at King & Spalding. He can be contacted at [email protected].