In the mid-1970s, the federal government became concerned about the rising costs of the Medicaid drug program. The government believed that the amount reimbursed to pharmacies by many state Medicaid agencies was too high. In an effort to correct this perceived problem, contain costs, encourage the use of generic drugs, and establish a more uniform drug benefit program in each state, the government established the maximum allowable cost (MAC) program for drugs in 1975 (42 C.F.R. part 19). The original MAC program was modified in 1987 (42 C.F.R. parts 430 and 447). Under the 1987 law, a pharmacist's reimbursement varies according to whether the drug is a multiple source drug, for which CMS has established a specific upper limit (called the federal upper limit [FUL]) or another drug. A multiple source drug is one that is produced and marketed by more than one manufacturer.
CMS has identified certain commonly used multiple source drugs and publishes a list of these drugs with the FUL price for each drug and the source for the FUL (https://www.medicaid.gov/medicaid/prescription-drugs/pharmacy-pricing/index.html). A pharmacy that dispenses a drug on the FUL list is usually reimbursed by the state for the listed price of the drug plus a reasonable dispensing fee, which is determined by each state.
The FUL reimbursement scheme was conceived in response to pharmacist complaints about the original MAC list of drugs, which was similar to the FUL list. Pharmacists complained that some of the reimbursement prices specified by CMS on the MAC list were so low that they could not even purchase the drug at that price. When pharmacists asked CMS to justify such prices, the agency often was evasive.
In an effort to address these concerns, the regulations specified that the reimbursement price for FUL drugs must be equal to 150% of the published price for the least costly therapeutic equivalent (42 C.F.R. § 447.332(b)). The published price was the average wholesale price (AWP) of the drug, which is the manufacturer's suggested price for wholesalers to sell to pharmacies. In reality, the AWP is often greatly inflated compared with the actual acquisition cost (AAC) for pharmacies. A report of the OIG in June 2005 found that FUL amounts were five times higher than the AMP (DHHS Office of Inspector General, 2005). The AMP is defined as the average price paid by a wholesaler to a manufacturer for the retail class of trade based on sales records.
As a result of the problems associated with AWP, the Deficit Reduction Act (DRA; P.L. 109-171) of 2005 authorized CMS to base the calculation of FUL prices on AMP. CMS subsequently published a final regulation that, as of October 1, 2007, it would base FUL at 250% of AMP (72 Fed. Reg. 39142, July 17, 2007). The agency estimated that basing the FUL on AMP rather than AWP would save the federal government and the states $8.4 billion over the next 5 years. The new basis for calculating FUL, however, caused great alarm in pharmacy. A report from the General Accounting Office dated December 22, 2006, but released in late January of 2007, appeared to justify the alarm (https://www.gao.gov/assets/gao-06-69r.pdf). The report notes that basing the FUL on AMP would, on average, result in pharmacy reimbursements 36% below average retail pharmacy acquisition costs.
These concerns caused pharmacy organizations to launch legal and legislative efforts to block the impending CMS regulation. The National Community Pharmacists Association and National Association of Chain Drug Stores obtained a federal court injunction in November of 2007, preventing the implementation of the CMS regulation (NACDS and NCPA v. U.S. DHHS et al., Case: 1:07-cv-02017 (D.D.C. Nov. 2007)). The pharmacy organizations criticized the regulation on four grounds:
Misrepresenting the intent of the DRA and contravening the definition of AMP in the SSA
Including mail-order pharmacies and PBMs within the definition of retail class of trade, arguing that including these entities would result in lower AMP determinations
Not including a provision to ensure that the FUL price is actually available in a particular state
Not limiting FUL calculations to therapeutically equivalent drug products, as the law required
Awarding the injunction, the court agreed that the plaintiffs likely would succeed on the merits of their claims and that implementation of the regulation would put pharmacies out of business. In partial response to the injunction, CMS issued a final rule in October of 2008, revising its definition of multiple source drugs, changing the definition of a drug from one sold or marketed in the United States to one sold or marketed in the state (73 Fed. Reg. 58491). The rule, however, placed the burden on the state or pharmacy to prove that the FUL price is not available nationally.
In 2010, the ACA again revised the FUL limit to what it is today: no less than 175% of the weighted average of the most recently reported AMPs for therapeutically equivalent drug products available for purchase by retail pharmacies on a nationwide basis. In 2016, CMS enacted regulations providing that it will calculate FUL prices at 175% of the weighted average (42 C.F.R. § 447.514(b)(1)). Apparently noting pharmacy's concerns over the 2007 regulations, the regulations also establish an exception to the FUL limit calculations, which allows for the use of a higher multiplier when the FUL calculation amounts to less than the average retail community pharmacies' acquisition cost (42 C.F.R. § 447.514(b)(1) and (2)). The ACA revised the definitions of AMP and multiple source drugs and replaced the contentious "retail pharmacy class of trade" with "retail community pharmacy." Accordingly, the 2016 regulations define "retail community pharmacy" as an independent, chain, supermarket, or mass merchandiser pharmacy, which dispense medications to the general public at retail prices, but does not include mail order, nursing home, LTCF, hospital, clinic, not-for-profit or government pharmacies, or PBMs (42 C.F.R. § 447.504(a)). AMP is defined as the average price paid to the manufacturer by wholesalers for drugs distributed to retail community pharmacies and retail community pharmacies that purchase drugs directly from the manufacturer.
The FUL price must be based on quantities of 100 tablets or capsules or, if the drug is liquid or is not commonly available in quantities of 100, it must be based on the quantity that is commonly provided by pharmacists. Moreover, the agency must specify the compendia source for its price basis for each drug (e.g., Medi-Span, Blue Book, Red Book). A drug cannot be placed on the FUL list, unless it has been evaluated by the FDA as therapeutically equivalent in the Approved Drug Products with Therapeutic Equivalence Evaluations (Orange Book) and has been listed by at least three suppliers (42 C.F.R. § 447.514(a)).
Under the original MAC program, the state had little flexibility with respect to the reimbursement of individual multiple source drugs. If the MAC list specified that a pharmacy be reimbursed 3.2 cents per capsule for a particular multiple-source drug, the state had to reimburse the pharmacy at that rate, regardless of the fact that no generic was available at that price. The FUL program grants the state much more flexibility. The regulations specify that, in the aggregate, the state agency must not exceed its payment levels (42 C.F.R. § 447.512(a)). Thus, the state can override the FUL list and reimburse pharmacies for more than the FUL price for a particular drug or drugs, as long as it compensates by reducing the reimbursement price for another drug or drugs. In other words, if at the end of the year the state has not reimbursed pharmacies more than it would have had it followed the list exactly, the state would be in compliance with the regulations. Because of this flexibility, most states developed their own MAC list programs, which include more drugs at lower reimbursement prices to pharmacies than the FUL list.
If a drug is not on the FUL list or if it is on the FUL list but is one for which the prescriber has requested the brand name product, the regulations until 2016 specified that the pharmacy was to be reimbursed the lower of (1) the estimated acquisition cost (EAC) of the drug plus a reasonable dispensing fee or (2) the provider's usual and customary charges to the general public (42 C.F.R. § 447.331(b)). Regulations enacted in 2016 now require that the state Medicaid agency payments must not exceed in the aggregate the lower of (1) AAC plus a professional dispensing fee established by the agency or (2) providers' usual and customary charges to the general public (42 C.F.R. §447.512(b)). Under the "lower of" provision, a pharmacy that regularly sells certain competitive drugs at low prices to non-Medicaid patients must honor these prices to Medicaid as well. Pharmacies have been subject to disciplinary actions and substantial fines for violating this provision. The 2016 regulation replaces the EAC, which was defined as the state Medicaid agency's best estimate of what pharmacists pay for the drug, with AAC. The regulation defines AAC as the state Medicaid agency's determination of the actual prices the pharmacy pays to acquire drug products (42 C.F.R. § 447.502). In reality, AAC prices as determined by the states are not the actual price a pharmacy pays, since the surveys that the state Medicaid agencies rely upon to determine AAC exclude off-invoice discounts, rebates, and price concessions. The 2016 regulation also changed "dispensing fee" to "professional dispensing fee" to reflect that the dispensing fee should reflect the pharmacist's professional services and costs.
If a prescriber of a multiple source drug certifies in the prescriber's own handwriting that a specific brand drug is "medically necessary" for a particular recipient, the FUL price does not apply and the pharmacy is reimbursed based on the "lower of" formula. The regulations allow the state Medicaid agency to decide what certification form and procedure are used; however, a check-off box on a form is not acceptable (42 C.F.R. § 447.512(c)). Notations such as "brand necessary" on the prescription form are allowable.
Although the 2016 CMS regulations eliminated the EAC, pharmacists should understand the history behind this change and the contentious relationship of the EAC to AWP. For several years, most state Medicaid agencies traditionally defined the EAC of a drug product as the AWP, an estimated price established by the manufacturer for its product, but not actually the average price that wholesalers charge pharmacy customers. For years, CMS disapproved of this interpretation of the EAC, contending that AWPs are in excess of pharmacies' AACs. In fact, the agency threatened to force states to reimburse pharmacies on the basis of AAC in 1975 but withdrew after deciding that determining the AAC would be too expensive.
OIG reports between 1984 and 2001 found that pharmacies' AACs fell almost 22% below the AWP (https://oig.hhs.gov/oas/reports/region6/60000023.pdf). The reports recommended that CMS prohibit the use of AWP as the EAC. CMS complied by seeking a requirement that states reduce AWP by 10.5%; however, the national pharmacy organizations blocked this proposal. Finally, CMS issued a memo to the states saying that they could not rely on AWP as the EAC without evidence showing that it was the closest estimate. Nonetheless, some states continued to define the EAC as such, although many began defining the EAC as a discounted AWP.
Proving that it meant what it said, CMS disapproved Louisiana's Medicaid plan on the basis that the state defined the EAC as AWP and Louisiana sued in Louisiana v. U.S. Department of Health and Human Services, 905 F.2d 877 (5th Cir. 1990). Louisiana argued that federal law does not prohibit reimbursing pharmacists at a rate based on AWP, and CMS was attempting to change federal law. The court disagreed, stating that CMS is not prohibiting the use of AWP, but only saying that this price is not the closest estimate of the price that pharmacists are paying for the drugs. Louisiana further contended that consideration of its reimbursement plan for pharmacists as a whole would reveal that the state's method actually reduced payments by 9.36% below AWP. The court acknowledged that this may be so, but held that it does not excuse the state from complying with the requirement that the EAC must be the state's closest estimate, and AWP is clearly not. After its victory in Louisiana, CMS would not approve any state plan that reimbursed pharmacies at full AWP.
Following the government's lead, private third-party programs also no longer reimbursed pharmacists at the full AWP. AWP as a basis for any pricing may disappear; not only because the price bears little relevance to actual cost but also because of lawsuits against drug manufacturers establishing that artificially inflated AWP prices provide an opportunity for pharmacy benefit managers (and dispensing pharmacies) to bill higher prices for prescriptions, thus allowing them greater profits at the expense of government and private third-party plans as well as patients (In re Pharmaceutical Industry Average Wholesale Price Litigation, 2009 WL 3019691, C.A.1 (Mass., Sept. 23, 2009)).
Perhaps, the most significant assault against AWP was a lawsuit against First DataBank (FDB) and McKesson because they conspired to inflate AWP prices by using a markup of 1.25% over AWP instead of the 1.2% figure historically used for AWP (New England Carpenters Health Benefits Fund v. First DataBank, Inc., 244 F.R.D. 79 (D. Mass. 2007)). The court approved a settlement in this case in 2009 (New England Carpenters Health Benefits Fund v. First DataBank, Inc., 602 F. Supp. 2d 277 (D. Mass. (2009)). Under the settlement, FDB agreed to apply the 1.2% factor to about 1,400 drug products that had been fraudulently increased. In actuality, on September 26, 2009, FDB rolled back the AWP to 1.2% for 28,000 drug products and announced that it would discontinue publishing AWP prices within 2 years. McKesson ultimately settled for $350 million. The settlement affected pharmacies, in that third-party plan reimbursements for thousands of drug products have been potentially reduced by 5%. This prompted NACDS to bring an unsuccessful lawsuit, opposing the settlement on the basis that the pharmacies were innocent bystanders who would be adversely affected by the settlement (National Association of Chain Drug Stores v. New England Carpenters Health Benefits Fund, 582 F.3d 30 (1st Cir. 2009)). Meanwhile, a group of third-party payers not only did not believe that pharmacies were innocent but also believed they conspired with FDB and McKesson to fraudulently inflate AWP prices, and thus initiated a class action lawsuit in June of 2009 against nine Northern California retail pharmacy chains. The district court, however, ruled that the plaintiffs were barred from suing the chain pharmacies because the plaintiffs were members in the class settlement agreement in the New England Carpenters case that included a covenant not to further litigate on the same allegations (Skilstaf, Inc. v. CVS Caremark Corp., No. C 09-02514 (N.D. Cal., Jan. 13, 2010)).
Faced with large deficit budgets, some state legislators have enacted legislation to cut the reimbursement of Medicaid providers, including pharmacies, resulting in lawsuits by the providers. In California, for example, the state legislature voted to reduce Medicaid payments to pharmacies and other healthcare providers by 10% in 2008. Pharmacies, pharmacy organizations, and other healthcare providers sued the state to enjoin the cuts. After several judicial actions in the federal courts, including the U.S. Supreme Court, the plaintiff healthcare providers ultimately lost their quest. (See Independent Living Center of Southern California v. Shewry, 543 F.3d 1050 (9th Cir. 2008); Independent Living Center of Southern California v. Maxwell-Jolly, 572 F.3d 644 (9th Cir. 2009); Douglas v. Independent Living Center of Southern California, Inc., 132 S. Ct. 1204 (Feb. 22, 2012); Managed Pharmacy Care v. Sebelius, 705 F.3d 934 (9th Cir. Dec. 2012)). The Ninth Circuit Court of Appeals held that the Secretary of DHHS lawfully approved California's rate reduction based on her conclusion that states need not follow any specific procedural steps, such as considering the costs of providers; the state's reimbursement rates complied with the Medicaid Act; and Medicaid providers do not have a property interest in a particular reimbursement rate.
Pharmacists have not only contested the amount reimbursed under Medicaid for a drug's acquisition cost, but also challenged the adequacy of the dispensing fees. State Medicaid agencies determine the dispensing fees paid to pharmacies, which leads to considerable variation in the amount of the fees from one state to another.
In Pennsylvania Pharmaceutical Association v. Department of Public Welfare, 542 F. Supp. 1349 (W.D. Pa. 1982), a group of pharmacists and Medicaid recipients contended that the dispensing fee and reimbursement costs paid to participating pharmacies were so low that they violated state and federal Medicaid requirements. When the lawsuit was brought, federal regulations provided that the state pay pharmacies a dispensing fee calculated on the basis of a statewide survey of the cost to dispense prescriptions. The plaintiffs argued that the state failed to conduct the pharmacy surveys in order to obtain the dispensing cost data and that, if the state had done so, it would have found the dispensing fee to be less than the cost to dispense. However, the court held that the regulation imposed no duty on the state to conduct the surveys. Moreover, stated the court, the intent of the surveys was to determine maximum reimbursements, which the state was not required to pay.
The plaintiffs also argued that the low reimbursement schedule discouraged many pharmacies from participating in the program, thus denying Medicaid recipients adequate access as required by law. (Medicaid law requires that the fees to providers be high enough to ensure that an adequate number of providers participate in the state Medicaid program to serve recipients.) The court responded that Congress enacted Medicaid to provide healthcare for the poor and aged, not to subsidize or benefit healthcare providers. The state has no duty to guarantee that providers receive a profit. "If a provider finds participation in the program unprofitable, he should withdraw from the program" (542 F. Supp. at 1356).
The 1987 regulations eliminated the provision that states conduct periodic cost surveys. This elimination was hardly a substantial change, in view of the Pennsylvania decision and the fact that pharmacies were reimbursed inadequately, even in many of the states that did perform the surveys. In Massachusetts Pharmaceutical Association v. Rate Setting Commission, 438 N.E.2d 1072 (Mass. 1982), the court held that, as long as the agency did not act arbitrarily and capriciously, the adequacy of the reimbursement rate could not be challenged. These decisions were typical of pharmacists' lack of success in challenging reimbursement rates.
In 2007, Congress passed the U.S. Troop Readiness, Veterans' Care, Katrina Recovery, and Iraq Accountability Appropriations Act that, surprisingly, included a provision that written (not including electronic, oral, or fax) prescriptions must be executed on a tamper-resistant pad. The requirement was to go into effect on October 1, 2007, but pharmacy and physician organizations vehemently protested that they could not comply by that date, and Congress extended the deadline to October 1, 2008. To be considered tamper resistant, the prescription form must contain one or more industry-recognized features designed to prevent:
Unauthorized copying of a completed or blank prescription pad
Erasure or modification of information written on the prescription pad by the prescriber
The use of counterfeit prescription pads in order to be considered tamper resistant by a state
Emergency fills are permitted as long as a prescriber provides a verbal, faxed, electronic, or compliant written prescription within 72 hours.