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Stay ahead of the curve.

George KitchensBy George Kitchens, RPh, President, Artia Solutions

Since the 2006 lawsuit filed, and won, by the Prescription Access Litigation Project (PAL) over the manipulation and inflation of the commonly used Average Wholesale Price (AWP), the pharmacy industry has been exploring various drug price benchmarks to use as a basis for purchases and reimbursement rates.

The NCPDP Special Committee on AWP issued recommended criteria for a new drug price benchmark and other organizations, such as AMPAA and NASMD, have offered opinions on which price type should be used. A number of state Medicaid agencies have followed the example of Alabama and are surveying their pharmacies to determine the average acquisition cost (AAC) and CMS has embarked on a national survey of drug stores to calculate and publish a National Average Drug Acquisition Cost (NADAC). Predictive Acquisition Cost (PAC), from Glass Box Analytics, uses a predictive analytics model to determine an estimation of acquisition cost for all drugs.

So, we have options. And generally we have agreement that the closer a price benchmark is to the provider’s true acquisition cost, the better. But what does this mean in practical terms? If a payer uses an acquisition-based benchmark, such as PAC or NADAC, rather than AWP or WAC, what is the impact on its drug spend and how are its provider pharmacies affected?

A comprehensive study including the most commonly used drug price types across a variety of payers and providers would be required to fully answer these questions, of course. But analysis of a few select examples indicates that the choice of one price benchmark over another can have a significant impact and should not be taken lightly.

In the development and delivery of PAC, Glass Box Analytics has conducted research and analysis for government and commercial payers, PBM’s, wholesalers, and retail pharmacies in an effort to establish transparent, fair and balanced ways to address drug pricing challenges between stakeholders.  Without divulging identities of the participants or any proprietary information, some highlights from their findings are:

  • Using published State Maximum Allowable Cost (SMAC) values from 16 state Medicaid websites and comparing those SMAC values to PAC reveals that, on average, 28% of SMAC reimbursement values are too high, while 26% are actually too low.  Optimally, SMAC price lists ensure that pharmacy networks are not reimbursed below the drug’s actual cost, while at the same time ensuring the state Medicaid is not over reimbursing for the drug.
  • Analysis of 580 SMACs for a state Medicaid identified 67 drugs for which reimbursement would be too high and 104 for which reimbursement would be too low.  The annualized cost increase from raising reimbursement rates that are below the pharmacy network’s acquisition cost total approximately $584,000. The annualized cost savings from reducing reimbursement rates to a level of 50% profit-per-script over acquisition cost total $2,024,000.  The Medicaid is able to ensure the SMAC list is balanced and fair to the pharmacy network, which results in approximately $1,440,000 in savings to the state Medicaid.
  • Similar analysis using a larger sample size of 722 drugs for another state Medicaid revealed that the Medicaid is significantly over reimbursing for 86 drugs and significantly under reimbursing for 81 drugs. Adjusting the SMACs that are too low increases the spending for those drugs by approximately $1,131,000 annually.  Reducing the SMACs that are too high decreases the drug spend by approximately $3,406,000.  Again, the state Medicaid achieves a more fair and balanced SMAC list, saving a total of approximately $2,275,000 annually.
  • A health plan chose to take ownership of price setting activities from its PBM and identified approximately 10-20 percent in savings while at the same time better balancing the MAC.  The health plan returned all of these savings back to the network via a high fill fee and through pay-for-performance programs.
  • A comparison of PAC versus NADAC for one state Medicaid across 37,541 NDC’s indicated that using PAC to set appropriate MACs would save an additional $4,000,000 per year. However, when accounting for all NDC’s, including those for which no NADAC value is available, PAC would enable the state Medicaid to realize an additional $40,000,000 in savings.  This is because a PAC value is available for an additional 10,625 NDCs, including brand, specialty, and physician-administered drugs. With such significant savings, this state Medicaid would provide a fill fee to its pharmacy network of nearly $10 per script.
  • For a regional retail chain with more than 400 pharmacy locations maintaining a “loss file,” which identifies claims reimbursed below acquisition cost, analysis using PAC indicated that for 21 percent of the claims the payer did not reimburse the pharmacy chain sufficiently and for 22 percent of the claims, the retail chain purchased the drug at a higher than optimal price in the market.
  • For another state Medicaid that utilizes a lesser-of logic involving (AMP)-based Federal Upper Limit (FUL), PAC analysis determined that for approximately one third of drugs, the pharmacy would be reimbursed a rate less than what it paid to acquire the drug. An analysis of the overall SMAC for this state identified sufficient opportunities for price reduction to eliminate the use of the FUL in lesser-of logic and thereby move to eliminate situations where the pharmacy is under-water when filling a script.
  • Working with pharmacy chains to calculate a more stable Generic Effective Rate (GER) based on PAC, as opposed to AWP, resulting data was used to demonstrate under-reimbursement when requesting payment adjustments and to make tough decisions about whether claims will be filled for specific cases.

As stated previously, a comprehensive and objective study is required to assess the accuracy of drug price benchmarks in tracking drug acquisition costs and to measure the impact that broad use of such a benchmark would have throughout the drug supply chain. For now, it is for stakeholders to judge which benchmark or price type best serves the needs of their organizations. Going by these few examples, we can at least safely say that it is worth the time and effort to review and carefully consider the options.

The Affordable Care Act (ACA) represents one of the most dramatic changes in the government’s involvement in healthcare. It affects, and will continue to affect, nearly every aspect of the way that healthcare in the United States is delivered, consumed, and paid for. Although the law is complex, its goal is a simple one: to ensure that everyone receives as high quality healthcare as possible at an affordable cost.

The act was spurred on by the increasing number of people without health insurance. In 2009, a year before the law passed, 50.7 million non-elderly people in the United States did not have health insurance, up from 46.3 million in 2008, according to the U.S. Census Bureau. The bureau reports that almost 80 percent of those without insurance lived in families headed by someone fully employed. Some 18.1 percent of full-time employees and 28.7 percent of part-time employees between the ages of 18 and 64 were without insurance for all of 2009.

We will examine the impact of each provision that affects healthcare payers, or health plan sponsors, individually beginning with Health Insurance Exchanges. The following is a brief summary of the law’s major requirements, along with a timeline when each has gone into effect, or is scheduled to be put into effect. Here we can review the individual mandate that requires most U.S. citizens and legal residents to have health insurance, what the government will be subsidizing and what’s required of companies with 50 or more full-time employees. We will also review Medicaid expansion, changes to Medicare, the establishment of medical loss rations, and the minimum requirements for coverage.

  • Establish healthcare exchanges in each state through which individuals can purchase health insurance. Every state is required to set up an American Health Benefit Exchange, where individuals can compare the costs and benefits of health insurance plans, and then purchase coverage.

Went live on October 1, 2013

Start date of purchased insurance: January 1, 2014

  • Individual mandate that requires that most U.S. citizens and legal residents have health insurance. Nearly all U.S. citizens and legal residents are required to purchase health insurance as of 2014. Penalties for not purchasing insurance will be phased in, beginning with the greater of $95 or one percent of taxable income per family in 2014, and rising to the greater of $2,085 or 2.5 percent of taxable income in 2016. Exemptions can be granted for a variety of reasons, including financial hardship, religious objections, and others.

Go live date: January 1, 2014

Fully phased in: January 1, 2016

  • Subsidize individuals and families who cannot afford health insurance. The federal government provides a variety of subsidies for individuals and families who cannot pay for health insurance. The subsidies are on a sliding scale, depending upon income levels.

Go live date: January 1, 2014.

  • Require that employers with 50 or more full-time employees offer coverage to their full-time employees. This had initially been schedule to go into effect in January, 2014, but was postponed until January, 2015.

Go live date: January 1, 2015

  • Medicaid expansion. The law expands Medicaid coverage to all those not eligible for Medicare under the ages of 65 who have incomes up to 138 percent of the federal poverty level.

Go live date: January 1, 2014

  • Changes to Medicare. The act changes Medicare in many ways, including restructuring payments to Medicare Advantage plans. These changes are being phased in over time.

Go live date: Changes began phasing in, starting 2010

  • Establishment of Medical Loss Ratios (MLRs). Beginning in 2011, payers were required to meet a minimum medical loss ratio, the percentage of premium dollars that insurance companies spend on providing medical care rather than on administrative costs or profits. Plans for large group markets are required to have MLRs of 85 percent (in other words, 85 percent of premiums must go toward medical care), and those for small group markets and individual plants must have MLRs of 80 percent. If MLRs aren’t met, plan members receive rebates.

Go live date: 2011

  • Minimum requirements for coverage.  All health benefits packages offered by payers must offer at a minimum a comprehensive group of essential health benefits as defined by the Secretary of the U.S. Department of Health and Human Services (HHS).

Go live date: January 1, 2014


Tell us what you think

We would like to hear from you on the following questions regarding how the healthcare reform affects healthcare payers and health plan sponsors:

How do the new Health Insurance Exchanges (HIE) affect the healthcare marketplace? Will the additional competitive space be a positive impact economically?

What challenges to you expect to encounter with the entrance of HIEs?

Do you believe the Medicaid expansion will positively affect your business? What changes do you expect to see your organization make in terms of servicing the potential surge of new members?

Will your organization face decisions to reduce benefits or increase out-of-pocket payments given the ACA changes to Medicare, specifically the Medicare Advantage Plans?

Has your organization considered an ACO model to improve efficiency due to the reduction of service payments by Medicare or due to the requirement of medical loss ratios?

In what way(s) will the Cadillac Tax alter your organization’s plan offerings?

What administrative tools or technologies have your organization implemented to help assist in complying with all the new regulations and documentation requirements?


For more details on the Healthcare Reform from the payer perspective, click here to download the white paper.