Summary

The outcome of the Medicaid AMP debate will have much bigger implications beyonfthe Medicaid program.  It will reshape marketing and distribution policies for both brand and generic manufacturers, while also challenging business models of PBMs and pharmacies.

Analysis

Why do I spend so much time writing about pharmacy reimbursement using Average Manufacturer Price (AMP)? After all, it deals primarily with Medicaid, which now accounts for less than 10% of drug spending.

Here’s why: The outcome of the AMP debate will reshape marketing and distribution policies for both brand and generic manufacturers, while also changing business models within the pharmacy supply chain. The political environment also looks increasingly unfavorable for the pharma industry.

Reimbursement drives provider behavior

A core premise of my research and consulting is that reimbursement drives behavior in the pharmacy supply chain – the network of providers, pharmacies, wholesalers, and PBMs that sit between drug makers and patients.

I pointed out the impact on retail pharmacy profits in March (See
AMP's Impact on Pharmacy Profits - Council Site).  But the impact of drug reimbursement is broader.

The article cited in this post from last week’s Wall Street Journal describes how many small physician offices are “…getting out of the business of administering drugs for conditions ranging from anemia and cancer to arthritis and infections, forcing hundreds of thousands of patients to get the drugs elsewhere. It is an unintended consequence of a change in the way Medicare reimburses doctors for a class of drugs that are most often injected or infused.”

In other words, the Average Sales Price plus 6% methodology adopted by Medicare Part B is changing behavior at small providers. As I have pointed out many times before, average price methodologies expose cross-subsidies within the pharmacy supply chain.

AMP will drive behavior

The Deficit Reduction Act (DRA) will trigger even more dramatic changes. Jill Weschler at Pharmaceutical Executive provides a nice summary of the key issues in Medicaid Sets the Pace for Pharma Pricing. A few key points:

  • “CMS proposes that AMP calculations specifically include discounts to Medicare Part D plans, PBMs, mail-order pharmacies, state pharmacy-assistance plans, and several other entities. PBMs are up in arms because manufacturers would have little incentive to grant them discounts if it means reducing prices for everyone.” (I personally predict that AMP will exclude PBM Rebates due to political pressure.)
  • “While pharmacists don't like the AMP revisions, they are most upset about rule changes that would lower Medicaid reimbursement for generic drugs significantly.” Very true, although many states are blunting the impact by topping off AMP. See States are watering down AMP's impact on drug reimbursement (Council site).
  • “…CMS plan to publicly disclose AMP data, which the agency collects from manufacturers but previously kept confidential.”
  • Rebates paid by manufacturers have declined as patients switched from Medicaid to Part D. (See “Duals create policy duel” pop-up box.)
Reimbursement is also a club

Don’t forget that reimbursement can also be used as a club to punish drug manufacturers and the pharmacy supply chain that supports them. IMHO, the political heat around spending will make reimbursement structure even more important to commercial strategy. Is it good to force small providers out of the infusion business? I’m not sure, but I doubt the issue will get a fair hearing in today’s political climate.

Analyses are solely the work of the authors and have not been edited or endorsed by GLG.