The Deficit Reduction Act

1
The Deficit Reduction Act its Impact on Pharmacy
2
Honesty and Ethical Ratings of People in
Different Professions, 2006 Gallup Poll
The Poll asked Americans to rate the honesty and
ethical standards of members of professions on a
five-point scale that ranges from "very high" to
"very low." Of the 23 professions tested in
2006, 9 had majority "high ethical" ratings.
SOURCE Honesty and Ethical Ratings of People in
Different Professions, 2006 Gallup Poll
3
Ohio Pharmacy Infrastructure

• There are about 2,157 pharmacies in Ohio
• 1,695 chain pharmacies and
• 462 independent pharmacies.
• Ohio chain and independent pharmacies
• employ about 109,180 full- and part-time workers,
  including about 6,270 pharmacists and
• pay over 1.46 billion in state taxes annually.

4
Breakdown of Average PharmacyPrescription
Reimbursement Average Medicaid Reimbursement in
2005 64.86
Pharmacy Operational Costs 10.48 (16)
Pharmacy Net Profit 1.83 (2 to 3)
Pharmacy Tax and Interest Liabilities 0.83 (1)
Amount Paid to Manufacturer Wholesaler 51.72
(80)
SOURCES NACDS Economics Department and Medicaid
drug utilization data from CMS
5
Community Pharmacy Profits vs. Other Industries,
2005
Food and drug stores operate on slim 1.6 percent
net profit marginsless than a third of the
Fortune 500 median. When you exclude food-only
stores, pharmacy net profits average 2 to 3
percent.
SOURCE Fortune, April 2006, Return on Revenues,
2005 Profits as a Percent of Revenues
6
Medicaid Reimbursement Has Two Components

• Medicaid Reimbursement
• Product Cost
• (AWP minus / WAC plus / FUL / MAC)
• PLUS
• Dispensing Fee
• (to pay for services)

7
Pharmacys Costs to Provide Prescription Drugs
Pharmacy Services

• Pharmacy Services Related Costs
• Pharmacy costs associated with ensuring that
  possession of the appropriate covered outpatient
  drug is transferred to the patient 42 CFR
  447.502
• Preparing and dispensing the prescription
• Checking on patient coverage at POS
• Prescription packages, labels, paper
• Compounding the Rx (if necessary)
• Special packaging (including unit doses, blister
  packs, bingo cards) and special supplies
  (syringes, inhalers)
• Delivery to beneficiary
• Compliance with federal state regulations
  governing Medicaid, HIPAA, etc.
• Overhead (salaries, utilities, rent)
• Equipment maintenance
• Assuring proper use of medication
• Drug utilization review
• Preferred drug list compliance
• Counseling patient
• Consulting with physician
• Medication therapy management

• Prescription Drug Costs Related Costs
• Purchasing the drug from the manufacturer or
  wholesaler
• (invoice price)
• Storage, warehouse, inventory, distribution/transp
  ortation of drug to individual pharmacy
• Cost of maintaining drug inventory investment
• Compliance with federal and state regulations
  governing handling of controlled substances
  (i.e., DEA, state licensing)
• Cost of returned goods

8
Growing Costs, Shrinking Profits

• Staff pharmacist wages have doubled in the last
  10 years
• Support staff wages, rent, utilities, and
  delivery costs have increased
• Gross margins have decreased 5.5 in the last 10
  years
• OBRA 90 mandates patient counseling
• Waiving of co-payment mandates when recipient
  demonstrates the inability to pay
• Increased prior authorization burden on
  pharmacist resulting in additional time and
  transmissions costs

9
CMS Explanation of Federal Statutory Requirements
re Adequate Reimbursement

• Federal Medicaid law requires that provider
  payments be
• consistent with efficiency, economy, and quality
  of care and
• sufficient to enlist providers to the same extent
  that they are available to the general population
  in the same geographic area.
• August 12, 1994 letter to CMS regional offices
  said states are expected to
• establish a reasonable dispensing fee level
• document support for those fees through
  activities such as
• audits and surveys of operational costs
• compilation of data regarding professional
  salaries and fees and
• analysis of compiled data regarding pharmacy
  overhead costs, profits, etc...

10
State Medicaid Reimbursement Formulas are
Multi-Faceted

• Pharmacies are paid for brand-name product at
  lesser of
• AWP/WAC product cost dispensing fee, OR
• Pharmacys usual and customary charge.
• Pharmacies are paid for multi-source (generic)
  product at lesser of
• AWP/WAC product cost dispensing fee, OR
• usual and customary charge, OR
• Federal Upper Limit (FUL) or State maximum
  allowable cost (MAC) rates.
• AWP is the manufacturers suggested list price
  for a wholesaler to charge a pharmacy for a drug.
• WAC is the price paid by the wholesaler for drugs
  purchased from the wholesalers suppliers
  (manufacturers).

11
Medicaid Pharmacy Reimbursement Before the DRA

• Medicaid programs express product cost in terms
  of prices listed in price compendia
• Discount off average wholesale price (AWP minus
  x), OR
• Markup of wholesale acquisition cost (WAC plus
  x).

12
Medicaid Rx Payment Components 1980 to 2004
(Current Dollars)
/ Rx
Drug Product Payment
Dispensing Fee Payment
SOURCE Compiled by the PRIME Institute,
University of Minnesota from data found in
Pharmaceutical Benefits Under State Medical
Assistance Programs, National Pharmaceutical
Council, 1976 to 2005.
13
Medicaid Drug Product Dispensing Fee Payments
as of Rx Payments 1990-2004
Drug Product Payment
of Rx Payment
Dispensing Fee Payment
Dispensing fees paid to pharmacies represent a
very small percentage of total Medicaid drug
spending
SOURCE 1990-2002 Compiled by the PRIME
Institute, University of Minnesota from data
found in CMS/HCFA-2082 Reports (adjudicated
paid claims), CMS/HCFA-64 Reports (budgeted and
expended funds), CMS/HCFA Medicaid Drug
Utilization Public use files, and the annual
volumes of Pharmaceutical Benefits Under State
Medical Assistance Programs (Reston, VA
National Pharmaceutical Council, 1967-2002).
2003-2004 Estimates from NACDS Economics
Department.
14
Dispensing Fees Are Well Below the Cost to
Dispense

• Ohio Medicaid Dispensing Fee 3.70
• Last increase to Medicaid Dispensing Fee 20
  cents, from 3.50 in 1998
• 1986 Fee 3.12
• National average Medicaid Dispensing Fee 4.50
• Average Cost to Dispense in Ohio 10.23

15
New Federal Upper Limits Under DRA

• Until now
• Federal law has limited state Medicaid
  reimbursement for generic drugs, setting upper
  limits (FULs) based by federal agency CMS on the
  lowest price listed for all equivalent products.
• FULs set only after two generic copies enter
  market.
• Under DRA, beginning 2nd Qtr 2007
• FULs to be set based on the lowest average
  manufacturer price (AMP) among equivalent
  products.
• No wholesale markup included.
• Discounts included (PBM, mail) not available to
  retailers.
• Use of lowest AMP as the basis for generic drug
  reimbursement significantly underpays pharmacies
  and threatens Medicaid beneficiary access to
  pharmacies
• FULs will be calculated as soon as first generic
  hits market.

16
AMP as Inappropriately Calculated Retail and
Non Retail Pharmacy Purchasers (Brand Name Drug)
does not include back end rebates these entities
might receive that may further lower ultimate
price paid.
1.000.960.940.880.76
0.91
AMP
5
Source Based on CBO Report, Prescription Drug
Pricing in the Private Sector, January 2007
17
Advantages of Generics

• Average cost of generic under Medicaid nationally
  1/6 average cost of brand name product
• Average generic/brand cost ratio in Ohio
  Medicaid 1/8
• Average Ohio Medicaid generic 15
• Average Ohio Medicaid brand 117.50
• Seven new generic versions in 2006 of
• Ambien Wellbutrin XL
• Lexapro Zocor
• Mobic Zoloft
• Pravachol (Total 5.3 percent of Ohio Medicaid
  drug spend)
• Coming soon in 2007 Generic Norvasc

18
Impact of AMP-Based FULs

• Because public disclosure of AMP has been legally
  prohibited until now, exact impact of AMP-based
  FULs still unknown, but NACDS estimated impact on
  pharmacy (calculated using data published in
  federal reports)
• Reduction in pharmacy reimbursement for generic
  product 50 to 70 on average
• Reduction in total reimbursement for generic
  prescriptions after including dispensing fees
  approximately 25

19
DRA Impact for Ohio Pharmacies

• Projected total national impact on pharmacy 2006
  to 2010 3.6B.
• CMS projected total national impact 2007 to 2011
  8B.
• GAO Projection AMP-based FULs will be 36 below
  pharmacies cost to acquire the drugs, 65 below
  cost of more expensive generics.
• NACDS Projected OH impact per generic
  prescription 4.30 per prescription.
• NACDS Projected total loss over 12 months for OH
  pharmacies 63.22 million.

20
Grant Thornton Cost of Dispensing Study

• Grant Thornton, LLP, and MPI were engaged by the
  Coalition for Community Pharmacy Action (CCPA) on
  behalf of the National Association of Chain Drug
  Stores (NACDS) and the National Community
  Pharmacists Association (NCPA).
• The 2006 Cost of Dispensing (COD) Report focused
  on overall COD and Medicaid COD for prescriptions
  filled during the period of March 2006 through
  August 2006.
• Purpose of the study was provide a comparative
  analysis of dispensing costs across all states
  and types of payers.
• Data was gathered from both independent and chain
  retail pharmacies using electronic and paper
  surveys.

21
COD Survey was Nationwide

• Information was collected from
• 832 million prescriptions
• dispensed by 23,152 pharmacies
• in all 50 states, the District of Columbia, and
  Puerto Rico.
• Data was analyzed to calculate
• Nation-wide cost of dispensing on a
  per-prescription basis
• Nation-wide cost of dispensing on a per-store
  basis (that is, every store is counted equally,
  regardless of its prescription volume)
• Cost of dispensing for prescriptions filled by
  stores in rural locations and in urban locations
• Cost of dispensing by state

22
COD Survey Findings
23
BASIC FACTS

• Ohio Medicaid dispensing fees are
• 35 percent the cost to dispense.
• With implementation of AMP-based FULs, Ohio
  Medicaid will reimburse for generic drug products
  at 36 to 65 percent below cost of those products
  to pharmacy.
• OHIO PHARMACIES ARE BEING ASKED TO PARTICIPATE IN
  MEDICAID AT AN AVERAGE
• PER SCRIPT LOSS OF 35 PERCENT!

24
Impact of AMP-Based FULs Unchanged Dispensing
Fees

• Ohios Medicaid pharmacies may have to
• Reduce hours
• Reduce staff
• Reduce services
• Worst case scenario Close doors in low-income
  communities
• REDUCING OR CUTTING OFF PHARMACY ACCESS TO
  MEDICAID AND NON-MEDICAID PATIENTS
• Below-cost reimbursement for generics will create
  disincentives for Ohio pharmacies to encourage
  doctors and patients to use low-cost generics
• 6-Fold increase in Medicaid Drug Costs?

25
Highest/Lowest Medicaid Generic Dispensing Rates,
2006
Source Wolters-Kluwer Health Source
Pharmaceutical Audit Suite, January-November 2006
26
Ohios Pharmacies Seek

• Increased dispensing fees for generic drugs
• Short term Amount sufficient to offset losses
  under DRA (4.30 plus 3.70 8.00)
• Using 25.5M savings to State from implementation
  of DRA plus 59.66 percent Federal match
• Long term Amount sufficient to cover 10.23
  dispensing costs and provide reasonable profit