US Pharm. 2015;40(6)(Generic Drugs suppl):47-53.

ABSTRACT: Efforts to agree on the appropriate federal upper limits (FUL) formula have been under way for a decade, and the federal government is still using the 2005 formula. The FUL sets a cap on federal reimbursement to states for dispensing outpatient generic medications through Medicaid programs. Although the final rule has been postponed numerous times, the evolution of the FUL and average manufacturer price is likely to extend beyond generic drug policy.

Controversy surrounding the Patient Protection and Affordable Care Act (PPACA) is never difficult to find; however, the public rarely hears about the role PPACA plays in fixing problems. For example, PPACA has had a profound effect on domestic violence. The law requires that insurers cover domestic violence screening and treatment, and it prevents domestic violence from being considered a preexisting condition. Compare this with media coverage of oral contraception, the PPACA mandate tax, or subsidies for plans from federally run health plan exchanges. One need not look far for another contested issue: federal upper limits (FULs) on Medicaid generic-drug reimbursement.

Although efforts to agree on the appropriate FUL formula have been ongoing for the past decade, the federal government is still using the formula from 2005, owing to the lack of a final rule. The FUL sets a cap on federal government reimbursement to states for dispensing outpatient generic medications through Medicaid programs. Much of the controversy revolves around the balance between patient-access and business-sustainability issues and government cost-controlling concerns, and had its origin when the Deficit Reduction Act (DRA) of 2005 reformulated the FUL to incorporate the average manufacturer price (AMP). The community pharmacy industry reacted quickly with a lawsuit when the DRA final rule was published, resulting in an injunction on the final rule. Soon afterward, PPACA offered a compromise addressing both industry and government concerns. However, a final rule has not yet been formulated; only a draft proposal exists. Although several government reports have recommended that the Centers for Medicare and Medicaid Services (CMS) implement the rule quickly, the publishing of the final rule has been postponed several times.

This article will discuss the events leading up to the PPACA changes and examine policies proposed in the draft proposed rule. First, however, relevant key finance policies and regulations of Medicaid drug reimbursement, along with their roles in and importance to generic drug policy, will be explained.

MEDICAID DRUG REIMBURSEMENT: FEDERAL POLICIES AND TOOLS

Medicaid Drug Rebate Program and AMP

Under the Omnibus Reconciliation Act of 1990 (OBRA ’90), the Medicaid Drug Rebate Program and the AMP were created to contain prescription drug costs across all states. Thus, drug manufacturers must agree to give each state that dispenses its drugs a rebate based on AMP and utilization before they can participate in a state Medicaid program. The manufacturer must also regularly submit to CMS confidential reports that include AMP. AMP is essential in calculating the rebate amounts and an increase faster than inflation can create an “inflationary” supplement rebate to states.

AMP is the average price wholesalers pay manufacturers for drugs sold to retail pharmacies. Essentially, OBRA ’90 created AMP as a pricing index for calculating manufacturer rebate amounts. In fact, until the passage of PPACA, AMP calculations were largely left up to the manufacturer. Before PPACA, vaguely defined “retail class of trade” transactions were allowed to be incorporated into AMP calculations. Manufacturer-generated AMPs were inconsistently calculated, included many nonretail pharmacy transactions, and were claimed to be artificially low for the retail community setting.

FULs on Reimbursement to States

The FUL formula was created to curb federal prescription drug expenditures by limiting the amount the federal government can reimburse states for generic drugs dispensed through a state’s Medicaid program. A state that reimburses a pharmacy for a drug above the FUL price will be wholly responsible for the difference. A state that reimburses a pharmacy for a drug at or below the FUL price will be reimbursed at its regular Federal Medical Assistance Percentage rate, the proportion of a state’s Medicaid expenditure that the federal government is responsible for.

Although the FUL has undergone key changes in the last decade, CMS still uses the same formula from 2005. PPACA established an updated formula in 2010, but the relevant regulation has not been finalized. Currently, the FUL is 150% of the lowest published price in any national drug compendium. Although not yet implemented, PPACA modifies the FUL to be no less than 175% of the weighted-average AMP, which will be less than the current formula. Regardless of how it is calculated, the FUL is limited to drugs that are generally available nationwide for sale to retail pharmacies and to therapeutically equivalent alternatives.

There are several points of contention. First, the FUL varies widely depending on which drug-cost definition is used. For example, the Health and Human Services Office of Inspector General (OIG) reported that FUL can vary by five times when lowest AMP data versus published price data are used.¹ Second, the inclusion criteria for calculating AMP have a significant impact on the FUL. For example, mail-order and specialty pharmacies typically have low-cost drug contracts that are not available to most retail community pharmacies, so using those transaction costs in calculating AMP impacts the FUL as well. Thus, much of the FUL controversy also involves AMP. Lastly, legislators and rulemakers have targeted criteria that dictate whether or not a drug is subject to FUL. For example, nationwide availability can be determined through National Drug Codes or by determining access by the pharmacy to purchase the drug. Whereas the latter scenario takes drug shortages into consideration, the former does not, and this affects the number of drugs that fall into the FUL category.

States’ Role in Drug Cost Containment

Although federal policies affect drug expenditure nationwide, individual state policies have the potential for the greatest impact on generic drug reimbursement and access. For example, a state can set supply limits, prior authorizations, step therapy requirements, preferred drug lists, or even mandatory generic substitutions. These restrictions are likely to favor the use of generic drugs. On the other hand, manufacturers can make a deal with a state wherein certain drugs receive favorable treatment in exchange for supplemental drug rebates to that state. This policy would likely promote the use of particular brands.

However, the increasing use of Maximum Allowable Cost (MAC) programs by states may decrease the impact of many federal cost-containment tools, especially the FUL. A state participating in a MAC program sets a maximum reimbursable amount for drugs and publicly lists those drugs and pricing. In fact, many of the MAC prices for generic drugs are lower than their FUL. Ultimately, stringent state reimbursement policies will likely lessen the FUL impact.

2005–2010: DRA OF 2005 AND PPACA

Concerns Over Generic Drug Reimbursement

In June 2005, the OIG released two reports that investigated drug reimbursement policies. In one report, the OIG compared the use of published prices in national compendia with AMP and found that AMP was significantly lower than published prices, with the largest difference among generic drugs. The median generic-drug AMP was 70% lower than the median published prices.² In the other report, the OIG compared the FUL to AMP and determined that the FUL was two to five times higher than the average AMP. In fact, the report recommended that Congress set the FUL closer to actual acquisition costs rather than published prices.¹

DRA of 2005

The 109th Congress acted quickly and passed the DRA in 2005. The final rule generated controversy over changes in the AMP definition, the DRA-based FUL formula, and the public reporting of AMP. Specifically, the new FUL formula of 250% of lowest listed AMP was significantly (2-5 times) lower than the pre-DRA formula. Also, more drugs were included in the FUL listing by effectively eliminating the therapeutic-equivalent requirement. The DRA also changed the criteria for transactions to be included in AMP calculations to “retail class of trade.”³ These transactions included those between the manufacturer and mail-order and specialty pharmacies, pharmacy benefit managers, hospitals, physicians, dialysis clinics, and surgical centers, the result being an artificially low AMP for use in drug reimbursement in the retail community pharmacy setting.

Suit Challenging the Implementation of the Final Rule

In response to the DRA final rule, retail community pharmacy associations expressed concerns over these changes. In support of their claims, both an OIG report and a General Accountability Office (GAO) report determined that the post-DRA FUL (250% of lowest AMP) was lower than pharmacy acquisition costs. The OIG found the proposal’s solution to this disparity to be insufficient.^4,5 In November 2007, the National Association of Chain Drug Stores and the National Community Pharmacists Association filed a suit to stop the final rule from being implemented. The suit challenged several provisions affecting retail pharmacies.

For example, the plaintiffs argued that “retail class of trade” went beyond and was in violation of the statutory definition of AMP, since it included transactions not applicable to the retail community pharmacy setting. The plaintiffs also argued that the FUL as an inclusion criterion was in violation of the statutory definition of “equivalent,” since the final rule effectively removed the therapeutic-equivalency requirement. The plaintiffs also challenged the public posting of AMP, arguing that public availability of AMPs would put pharmacies in a worse position during contract negotiations with private insurers. The concern was that private insurers would use FUL-like limits. Lastly, the plaintiffs also argued that the rule would have a disproportionately adverse effect on independent pharmacies in rural areas. If pharmacies can no longer sustain their business in vast rural areas where patients rely heavily on them for their healthcare, these patients would be disproportionately affected by the rule.

In December 2007, the U.S. District Court issued a preliminary injunction. The order prevented the government from continuing to implement Medicaid reimbursement rate provisions that would affect retail pharmacies, as well as the public posting of AMP data. The order effectively reverted FUL calculations to pre-DRA parameters. However, the injunction did not change how AMP would be calculated; rather, the court merely prevented the use of AMP to calculate the FUL. Owing to a congressional moratorium on relevant retail provisions, the other arguments not enjoined by the preliminary injunction (e.g., AMP definitions) continued to be implemented.

PPACA

Almost 3 years after the preliminary injunction, section 2503 of PPACA changed how FUL and AMP amounts would be determined. In so doing, PPACA created a compromise between stakeholders and the government, balancing opposite interests.

One provision of PPACA specifies that manufacturers must calculate AMP based only on drug purchases by or for retail community pharmacies and should exclude certain payments and reimbursements. Manufacturers must also exclude previously included transaction costs (e.g., mail-order and nursing home pharmacies, hospitals, clinics). However, these restrictions do not apply to the 5I class of drugs (inhalation, infusion, instilled, implanted, or injectable products not generally dispensed by a retail community pharmacy).

PPACA amends the FUL formula to be no less than 175% of the most recent weighted-average AMP for therapeutically equivalent multiple-source drugs available for purchase by retail community pharmacies on a nationwide basis. The PPACA-based FUL is higher than the DRA-based FUL, but lower than the current FUL or pre-DRA FUL.⁶

Through these two provisions, section 2503 of PPACA (titled “Providing Adequate Pharmacy Reimbursement”) has created a compromise between retail community pharmacy stakeholders and the federal government. On one hand, the government has a mechanism to control generic spending nationwide; on the other hand, retail community pharmacies have legislation that is cognizant of actual acquisition costs, thus addressing business-sustainability and patient-access concerns. Regardless, the actual effect of the law is pending, since the final rule has yet to be released. It was the approach of the final CMS rule pursuant to the DRA of 2005 that community pharmacy associations challenged, rather than the law itself.

2010–2015: DRAFT PROPOSED RULE

Since 2010, many stakeholders have been awaiting the PPACA rule. A draft proposed rule was published in February 2012. In addition to the draft proposed rule, CMS has been releasing monthly FUL calculations since 2011.

The draft proposed several approaches worth noting. First, CMS interpreted the PPACA phrase “no less than 175%” as requiring no upward adjustments in any case, since 175% is a more than adequate reimbursement to pharmacies. Although the rule acknowledges that the new FUL will be significantly less than the current FUL, it will be above state MAC prices; Indiana’s MAC program was cited as an example.

CMS also decided against incorporating “smoothing” (i.e., averaging) when calculating FUL amounts. Smoothing could provide a buffer for sudden fluctuations in drug prices. Though it declined to apply smoothing to FUL, CMS did require smoothing of AMP calculations. Additionally, CMS kept its “availability on a nationwide basis” requirement and proposed an NDC approach to determining availability nationwide. This approach, however, does not address fluctuations in access regionally and nationally during drug shortages.

The draft also addressed AMP provisions. CMS proposed that infusion pharmacies, home healthcare providers, and specialty pharmacies be included in the retail community pharmacy (RCP) definition. CMS proposed this inclusion criterion despite the fact that PPACA created the RCP definition so that only retail- and community pharmacy–based transactions would be included. Additionally, CMS did not define specialty pharmacy.

CMS also set a 90% standard for determining whether a 5I-class drug is “generally dispensed.” Specifically, if 90% or more of a manufacturer’s drug sales are to an entity other than a wholesaler for distribution to retail community pharmacies or to retail community pharmacies purchasing drugs directly from the manufacturer, the drug would be categorized as “not generally dispensed” through a retail community pharmacy.

Finally, the draft proposed policies that would increase the role of actual acquisition cost. For instance, the draft advises replacing the term “estimated acquisition cost” with “actual acquisition cost.” Additionally, CMS recommends requiring that states provide adequate data on actual acquisition costs to support changes in the professional dispensing fee or ingredient-cost reimbursement. This policy seems to cover both generic and brand medications.⁷

CONCLUSION

In summary, the FUL has undergone several legislative changes, a legal challenge, and two rounds of rule making, resulting in the same FUL formula from 2005. In its 2013 report, the GAO recommended that CMS “expeditiously implement the PPACA-based FUL formula to better control federal reimbursement for Medicaid covered outpatient prescription drugs.”⁸

However, if CMS simply republishes its draft proposed rule as the final rule, several concerns will persist. First, the draft does not provide a mechanism for price fluctuations during drug shortages. Second, the phrasing “no less than 175%” suggests that the legislative intent was to ensure that CMS would take a flexible approach to reimbursement. The Congress even titled section 2503 “Providing Adequate Pharmacy Reimbursement.” Given CMS’s dismissal of and stakeholders’ insistence on a flexible approach, this may offer an opportunity to challenge the final rule when published. Lastly, an OIG report raised concerns that localized fluctuations in actual acquisition costs would create disparate effects when the FUL is applied. Although the FUL was found to be similar to average actual acquisition costs derived from the National Average Drug Acquisition Cost CMS survey, regional differences in actual acquisition costs could put some pharmacies at a financial loss.⁸ Unfortunately, the draft proposed rule does not offer a solution for this disparity.

REFERENCES

1. Office of Inspector General (OIG). Comparison of Medicaid Federal Upper Limit Amounts to Average Manufacturer Prices. OEI-03-05-00110. Washington, DC: OIG; 2005.
2. OIG. Medicaid Drug Price Comparisons: Average Manufacturer Price to Published Prices. OEI-05-05-00240. Washington, DC: OIG; 2005.
3. Deficit Reduction Act (2005), Sec 6001(a)(2).
4. OIG. Deficit Reduction Act of 2005: Impact on the Medicaid Federal Upper Limit Program. OEI-03-06-00400 Washington, DC: OIG; 2007.
5. Government Accountability Office (GAO). Medicaid Outpatient Prescription Drugs: Estimated 2007 Federal Upper Limits for Reimbursement Compared With Retail Pharmacy Acquisition Costs. GAO-07-239R. Washington, DC: GAO; 2006.
6. Patient Protection and Affordable Care Act (2010), Sec 2503.
7. Medicaid program; covered outpatient drugs. Fed Regist. 2012;77:5318-5367.
8. GAO. Medicaid Prescription Drugs. CMS Should Implement Revised Federal Upper Limits and Monitor Their Relationship to Retail Pharmacy Acquisition Costs. GAO-14-68. Washington, DC: GAO; 2013.

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