On February 3, 2011, HHS Secretary Kathleen Sebelius sent a letter to state governors identifying several areas of potential cost savings for state Medicaid programs. As part of a discussion regarding “purchasing drugs more efficiently,” Sebelius announced that HHS is undertaking a first-ever national survey to create a database of pharmacies’ actual acquisition costs (“AACs”) for prescription drugs that states may use as a metric to determine state-specific Medicaid reimbursement rates. The results from the survey are expected to be available during 2011.

According to an attachment to the Secretary’s letter, recent court settlements have revealed the flawed nature of the information many states rely upon in order to establish their payment rates (e.g., “average wholesale price,” or “AWP”). The attachment states that because publication of major drug pricing compendia will be discontinued, states must find a new basis for drug pricing. A workgroup of state Medicaid directors and state Medicaid pharmacy directors have recommended the use of AACs. A CMS press release regarding the letter (including a link to the letter) is available here.

Two states, Alabama and Oregon, already have incorporated use of AACs in their Medicaid pharmacy reimbursement formulas. Using a contractor, Myers & Stauffer, the states randomly survey pharmacies regarding their acquisition costs, and use the data reported to set and periodically update pharmacy reimbursement rates. However, the information being collected to calculate AACs is defined differently in the two states, and there are various questions regarding what should or should not be reported. Notably, both states significantly increased the dispensing fees paid under their programs, presumably in response to pharmacy arguments that the prior dispensing fees were not sufficient to cover their dispensing and overhead costs.

There are numerous questions regarding what CMS will or will not consider part of AAC, and how the calculations will be performed. Potential issues include how CMS will treat rebates (not included in Alabama’s AAC), prompt-pay discounts, and various types of fees.

Notably, one of the major publishers of drug pricing data—Medispan—has announced that it intends to continue publishing AWP; consequently, it does not appear that states will be forced to move to a different benchmark, notwithstanding the Secretary's assertion. Additionally, the Affordable Care Act provided for CMS to publish new “Federal Upper Limit” (“FUL”) prices for generic and multiple source branded drugs, at not less than 175% of the utilization-weighted average manufacturer prices (“AMPs”) available to retail community pharmacies (as defined in the statute). State Medicaid reimbursement cannot exceed these FULs. CMS has yet to publish any FULs under the new law.

For generic and multi-source branded drugs, it is not clear whether pricing based upon AACs would be significantly different from that based upon AMPs. Nevertheless, CMS’s publication of the new AAC data could become significant for manufacturers, wholesalers, pharmacies, payors, pharmacy benefit managers and/or patients. The creation of a new pricing benchmark will allow pricing to be defined relative to that benchmark. We will be closely monitoring how AAC is defined, calculated, published and used.