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Paying for Prescribed Drugs in Medicaid: Current Policy and Upcoming Changes

Since the early 2000s, state Medicaid programs have made concerted efforts to control the cost of prescription drug spending. One crucial aspect in doing so is using a pharmacy reimbursement methodology that best reflects actual drug costs. Currently, states set pharmacy reimbursement policy within broad federal guidelines, resulting in a complex mix of reimbursement rules. Many states use list prices to set reimbursement levels, and these list prices increasingly have been criticized as not accurately reflecting the cost of the drug. Specifically, there are concerns that some benchmarks lead to inflated reimbursement levels. As a result, the federal government has proposed new rules that aim to make reimbursement policies more closely match the cost of obtaining and filling prescriptions. However, the change in policy may have varying effects on reimbursement, depending on the state’s current approach and the type of drug in question. This paper explains current Medicaid pharmacy reimbursement methodology and examines the potential effect of the proposed rule changes.

Medicaid Drug Reimbursement Policy

State Medicaid programs reimburse pharmacies for prescription drugs based on the ingredient costs for the drug and a dispensing fee for filling the prescription. States use a variety of benchmarks to set reimbursement for the ingredient costs.  Concerns about the accuracy of drug pricing benchmarks commonly used, particularly average wholesale price (AWP) and wholesale acquisition cost (WAC), have led states and the federal government to look for new ways to determine payment levels. In February 2012, the Centers for Medicare & Medicaid Services (CMS), released a draft rule that would change the basis of payment for Medicaid-covered drugs from an “estimated acquisition cost” (EAC) to an “actual acquisition cost” (AAC).  CMS proposed this change, because it feels that AAC will more accurately reflect the actual prices that pharmacies pay to acquire drugs.1 In addition to modifying the language of drug reimbursement, the draft rule suggested ways that states could determine AAC; a final rule is anticipated this year.

This paper explains current pharmacy reimbursement methodology; examines proposed and final rule changes that CMS has issued; reviews outside studies on drug pricing benchmarks and how they compare to each other; and provides independent analysis on how one possible AAC measure, the National Average Drug Acquisition Cost (NADAC), compares to previously used EAC measures.

Box 1: Glossary of Acronyms
  • EAC: Estimated Acquisition Cost; EAC is a benchmark used by many state Medicaid programs to set payment for drug ingredient costs
  • AWP: Stands for “Average Wholesale Price,” but is more akin to a sticker price; AWP is one benchmark used to calculate EAC
  • WAC: Wholesale Acquisition Cost; WAC is one benchmark used to calculate EAC
  • AAC: Actual Acquisition Cost
  • NADAC: National Average Drug Acquisition Cost; NADAC can be used to calculate AAC
  • FUL: Federal Upper Limit; FUL sets a reimbursement limit for some generic drugs
  • MAC: Maximum Allowable Cost; MACs are reimbursement limits set by states in addition to the FUL
  • AMP: Average Manufacturer Price; AMP is used to calculate drug rebates.  The ACA also established that it would replace list prices as the basis for FULs, but this has not yet been implemented

Key Findings

  • While CMS has proposed to move from EAC to AAC, EAC is still currently used as the basis of payment for Medicaid-covered drugs in most states.  Most states calculate EAC by applying a percentage reduction to Average Wholesale Price (AWP) or a percentage increase to Wholesale Acquisition Cost (WAC).  In September 2013, 12 states used AWP as their primary reimbursement metric, 16 states used WAC, and only 6 states used AAC. 17 states used a combination of benchmarks in setting reimbursement levels.
  • To better understand the prices that pharmacies pay to acquire drugs, the US government and outside groups have conducted numerous studies comparing drug pricing benchmarks to each other, as well as measures of acquisition costs.  These studies have shown that the relationships among list prices (WACs and AWPs) and average prices paid (Average Manufacturer Prices, or AMPs) depends on whether a drug is a single-source brand, multiple-source brand, or generic.  They have also shown that AMPs were consistently less than AWPs and generic WACs, but much closer to brand WACs.
  • Independent analysis in this brief finds that one proposed AAC measure, the NADAC, is below currently-used benchmarks for single-source drugs. For single-source drugs, NADACs are well below AWPs and just slightly less than WACs.  We found that the difference between generic NADACs and generic benchmarks became more exaggerated.  We also found that actual Medicaid payments to retail pharmacies for prescribed drugs are much closer to WAC and NADAC prices than to AWP.
  • Any reimbursement formula that uses fixed percentages, such as AWP minus 16 percent or WAC plus 4 percent, results in pharmacy profits that vary based on the price of the drug.
  • Dispensing fees are an important factor in overall pharmacy reimbursement. Today, dispensing fees range from $2 to $10, with an average of $5 or less per prescription. Changes in ingredient costs could have implications for dispensing fees; as states switch to using AACs for drug reimbursement, dispensing fees are likely to rise.
  • Although reimbursement policy is important, there are other factors that also affect Medicaid spending on prescription drugs, such as the demand for extremely expensive specialty drugs.
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