Medicaid Rule on Generic Drug Pricing

In a final rule published on July 6, the Centers for Medicare and Medicaid Services (CMS) announced that based on the Deficit Reduction Act of 2005 (“DRA”), Medicaid is changing its reimbursement methodology for generic drugs from 150% of average wholesale price (“AWP”) to 250% of average manufacturers price (“AMP”) plus a dispensing fee. This anticipated change has been a very hot topic in the health care industry for the past year. reports that

The new pricing and related changes will save $4.9 billion for the U.S. government during five years and $3.5 billion for the states, which jointly fund the program, according to Medicaid. While the new formula would affect the largest U.S. drugstore chains, including Walgreen Co. and CVS Caremark Corp., industry groups said the impact would be greatest at small pharmacies that depend more on Medicaid payments.

The National Association of Chain Drug Stores has pledged an “’All-Branches, All-Level Government Strategy’” to Fix Medicaid Reimbursement Model.” Who will be expected to pick up the slack? Private sector payers and FEHB plans.

CMS’s announcement further advises that

The DRA also makes an important change to health care purchasing by introducing transparency in Medicaid prescription drug pricing and requiring that for the first time, AMPs be publicly reported on the Internet. States will now be able to use actual AMP information as the basis for setting drug reimbursement. Drug makers will also have to report AMPs monthly, as well as quarterly, as was the practice prior to DRA. More frequent reporting will allow states to make timely adjustments to reimbursement rates.

This development could further accelerate the demise of the AWP. The rule is effective October 1, 2007.