Medicaid Average Manufacturers Price based Federal Upper Limits for Pharmacy Services Fact Sheet
The reimbursement models for pharmacies within the Medicaid program are complex and consist of both a reimbursement methodology for the ingredient component of a prescription drug as well as a fee for the dispensing of a prescription by a pharmacist, typically referred to as the dispensing fee or the Professional Dispensing Fee.
With respect to the ingredient component, several formulas are currently used for different classifications of single-source, generic and multiple-source drugs (the source refers to the manufacturer or supplier of the drug) to calculate the jointly federal and state government financed reimbursement rate. The Center for Medicare and Medicaid Services (CMS) is currently responsible for approving the total reimbursement that is paid to a pharmacy for filling a prescription for a Medicaid recipient.
Prior to the Affordable Care Act, states generally reimbursed pharmacies for the ingredient component of prescriptions filled for Medicaid recipients on the basis of the Estimated Acquisition Cost (EAC)[i] plus a dispensing fee. The EAC had traditionally been calculated differently for single-source drugs and generic or multiple-source drugs. Single-source drugs are typically reimbursed using either the average wholesale price (AWP)[ii] or the wholesale acquisition cost (WAC)[iii]. A small group of states currently reimburse on the basis of Average Acquisition Cost (AAC)[iv]. Whether a state uses AWP or WAC, it normally also includes a dispensing fee, which averaged $5 nationally. In contrast, generic and/or multiple-source drugs are generally paid subject to a maximum allowable cost (MAC)[v] or the Federal Upper Limits (FULs)[vi], which are applied in aggregate (per state) for each particular medication.
In 1987 Federal regulations were established to limit the amount, which Medicaid could reimburse for drugs with available generically. These limits are intended to assure that the Federal government acts as a prudent buyer of drugs. The concept of the upper limits program is to achieve savings by taking advantage of the current market prices. FULs were established for multiple source drugs that are:
- therapeutically equivalent
- available from three suppliers
- category A rated by the FDA
FULs were calculated using 150 percent of the lowest published price (AWP and WAC and using all compendia) that can be purchased in quantities of 100 or the quantity size most commonly listed.
MAC programs operate similarly to the FUL program in that States establish maximum reimbursement amounts for certain multiple-source drugs. Unlike the FUL program, States have flexibility in determining the drugs covered under their MAC programs and the formula used to set these drugs’ prices.
Average Manufacturers Price (AMP)
After the passage of the Deficit Reduction Act in 2005, Congress mandated that CMS begin implementing a model to eliminate the use of AWP-based FULs. They argued that AWP did not provide an accurate measure of cost because it failed to account for price concessions from manufacturers to wholesalers. Since 2007, CMS has been working through a lengthy multiyear process to implement an AMP[vii]-based FULs reimbursement model for multiple-source generic drugs. This formula to calculate the new FULs would equal 175 percent of the weighted AMP, which would be derived from retail pharmacy surveys of multiple-source generic drug costs.
Based on a preliminary estimate of the new FULs released by CMS, the resulting ingredient reimbursement rates will render the current reimbursements paid by many states wholly inadequate. As a result both Congress and CMS have indicated that the states should adjust their dispensing fees to pharmacies to a level that ensures fair compensation overall for the filling of a prescription. In short, pharmacies should be at least be held harmless from this change.
Action Needed Now!
CMS has appropriately recommended that states adjust their Medicaid dispensing fees to ensure that pharmacies are fairly and equitably reimbursed for their overall cost of filling a prescription. The National Association of Chain Drug Stores (NACDS) and the National Community Pharmacists Association (NCPA) have concluded that states will need to, in most, if not all instances, significantly increase their current reimbursement levels for dispensing a prescription in order to offset the decrease in ingredient reimbursement that will occur under the new AMP-based FULs. States, either on the basis of existing cost of dispensing studies or studies to be undertaken in response to CMS’s recommendation, will be able to determine the reimbursement gap that exists in their respective state. If states fail to increase the Medicaid dispensing fees and reimbursements decrease because of the lower AMP-based FULs, then provider pharmacies will unfairly suffer financially and may be forced to withdraw from a state’s Medicaid program, denying Medicaid recipients’ critical access to prescription medications and ancillary services. A recent study jointly sponsored by NACDS and NCPA estimates that more than 11,000 pharmacies nationwide would be forced to leave the Medicaid program or close as a result of inadequate AMP-based reimbursements.
Pharmacy and prescription access for Medicaid patients are vital for many reasons, including the many other services that pharmacists routinely provide (in addition to the prescriptions themselves) such as vaccinations, medication therapy management, health screenings, health education and innovative programs, all designed to improve patient wellness and prevent more costly forms of care.
Pharmacies deliver unsurpassed value for the overall health of Medicaid recipients in their community. Strong community pharmacies and strong pharmacy-patient relationships dramatically reduce overall Medicaid costs by preventing more costly services from being incurred. It is absolutely critical that states move quickly and fairly to ensure that Medicaid prescription services continue to be accessible to all Medicaid patients and that community pharmacies be held financially harmless because of the impending federal action.
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[i] Estimated Acquisition Cost (EAC): A state Medicaid agency’s best estimate of the price generally paid by pharmacies for a particular drug. Federal rules require that states pay for prescription drugs based on the lower of either EAC, which is often calculated using Average Wholesale Price (AWP), or “the usual or customary charge to the public.” Pursuant to the Deficit Reduction Act, EAC will be calculated on Average Manufacturer Price, rather than Average Wholesale Price (AWP).
[ii] Average Wholesale Price (AWP): A national average of list prices charged by wholesalers to pharmacies. AWP is sometimes referred to as a “sticker price” because it is not the actual price that larger purchasers normally pay after subtraction of undisclosed price concessions.
[iii] Wholesale Acquisition Cost (WAC): The price paid by a wholesaler for drugs purchased from the wholesaler’s supplier, typically the manufacturer of the drug. On financial statements, the total of these amounts equals the wholesaler’s cost of goods sold. Publicly disclosed or listed WAC amounts may not reflect all available discounts.
[iv] Actual Acquisition Cost (AAC): The net cost of a drug paid by a pharmacy. A drug’s AAC includes discounts, rebates, chargebacks, and other adjustments to the price of the drug, but excludes dispensing fees.
[v] Maximum Allowable Cost (MAC): The maximum payment that a state will make to a pharmacy for certain generic and multiple source drugs. States with MAC programs typically publish their own lists of drugs along with the maximum price at which the program will reimburse for those drugs.
[vi] Federal Upper Limit (FUL): The maximum amount of pharmacy reimbursement for product cost for certain generic and multiple-source drugs that the federal government will recognize in calculating federal matching funds for payment to state Medicaid programs.
[vii] Average Manufacturer Price (AMP): AMP is the average price paid by wholesalers to manufacturers for drugs distributed to retail pharmacies. It was created to calculate Medicaid rebates. The AMP is statutorily defined and its calculation is based on actual sales transactions. Drug manufacturers must report AMP data for all Medicaid-covered drugs to the Centers for Medicare & Medicaid Services (CMS) quarterly as a requirement of the Medicaid drug rebate program. Most state Medicaid agencies do not have access to AMP data, which is proprietary.