To: Medicaid Directors

To: Medicaid Directors

Cc: Interested Stakeholders

From: NAMD Staff

Date: Updated June 3, 2014

Subject: AAC-Based Prescription Drug Reimbursement Methodology

In conjunction with federal efforts to update the Medicaid outpatient prescription drug reimbursement policies, NAMD is monitoring major developments in states’ approaches to reimbursement. Recently, some states transitioned to a methodology utilizing actual acquisition cost (AAC).

This memo provides background information on AAC-based reimbursement methodologies, discusses recent state actions, and gives an overview of NAMD’s work on the issue. Please contact Andrea Maresca with questions.

Introduction

Medicaid prescription drug reimbursements consist of two components, the calculated ingredient cost and a dispensing fee. Most of the variation in state reimbursement methodologies occur in the former, the ingredient cost component. States utilize several different measures to calculate ingredient price, including average sale price (ASP), average wholesaler price (AWP), and wholesaler acquisition cost (WAC). These measures are commonly modified by a certain percentage, sometimes varying based on whether a drug is single-source or multiple source and branded or generic, to calculate the overall ingredient cost for a drug in that state. A dispensing fee is then added to the ingredient cost, which itself can vary depending on state policy decisions.

AAC-Based Reimbursement

AAC is a relatively new method of calculating the ingredient cost component of the pharmaceutical reimbursement. It came about in part due to concerns that other measures were fundamentally flawed and resulted in Medicaid overpaying for prescription drugs.[1]AAC rate development typically involves regular analysis of pharmacy invoices, published industry prices, and other factors to create an accurate picture of the costs pharmacies accrue as they acquire their stock.[2]

Alabama was the first state to implement AAC methodology in its Medicaid program, on September 22, 2010. It did so by working with a contractor to establish and periodically update AAC rates, while another contractor analyzed the cost of dispensing (COD) drugs in chain and non-chain retail pharmacies. The results of this work informed Alabama’s specific AAC methodology and its designated dispensing fee.

Since Alabama’s initiative, six additional states (CO, DE, ID, IA, LA, OR) have implemented AAC reimbursement methodology in their Medicaid programs. Each state followed the general pattern of working with contractors to develop AAC and COD rates, with the exception of Delaware. Delaware is the first state to use federal data from the National Average Drug Acquisition Cost (NADAC) survey.NADAC is a CMS-led effort started in 2012 to provide a national baseline of pharmacies’ acquisition costs. CMS began publically disseminating finalized NADAC data in November 2013.[3]At least one other state is currently in the process of implementing an AAC methodology using NADAC data.

Note that some states opt for a tiered dispensing fee based on overall volume of prescriptions filled, as higher volume is correlated with increased efficiency and lower costs. Also note that each AAC state’s dispensing fee is higher than non-AAC states, where such fees are typically less than $6. These higher dispensing fees are necessary to comply with CMS regulations requiring states set a best estimated acquisition cost and set a “reasonable” dispensing fee per prescription.[4]

The following table provides information on the seven states currently using AAC methodology.

State / Date Implemented / Ingredient Cost / Dispensing Fee
AL / 9-22-2010 / AAC if available, otherwise lower of WAC, FUL, or usual and customary charges / $10.64
CO / 2-1-2013 / AAC if available, otherwise lower of submitted ingredient cost or usual and customary charges. / Tiered:
< 60k annual prescriptions = $13.40; 60k to 90k = $11.49;
90k to 110k = $10.25;
> 110k = $9.31.
Rural pharmacies = $14.14
DE / 4-1-2014 (awaiting SPA approval) / AAC using NADAC data if available, otherwise 81% of AWP / $10.00
ID / 9-28-2011 / AAC if available, otherwise WAC / Tiered:
< 40k annual claims = $15.11;
40k to 70k = $12.35;
> 70k = $11.51
IA / 2-1-2013 / AAC if available, otherwise WAC / $10.12
LA[5] / 9-5-2012 / Single-source drugs: AAC plus 1% if AAC available, otherwise WAC
Multi-source: AAC plus 10% if AAC available or FUL, whichever is lower; otherwise WAC or FUL, whichever is lower / $10.51
OR / 1-1-2011 / AAC if available, otherwise WAC / Tiered:
< 30k annual claims = $14.01;
30k to 50k = $10.14;
> 50k = $9.68

Federal Regulatory Update

As Directors know, CMS announced that it intends to finalize the Medicaid AMP-based Federal Upper Limit (FUL) for multi-source drugs in July 2014.[6]In addition, the Administration’s most recent regulatory agenda included a target date of May 2014 to finalize the Medicaid outpatient prescription drug rule. NAMD has learned that the complex issues covered by the rule are taking more time in the regulatory review stage.

Separate House and Senate bipartisan letters to CMS have urged the federal agency to provide states sufficient time to review the rule and FULs and implement changes accordingly. It is NAMD’s understanding that CMS is actively considering these requests. We anticipate receiving more clarity on the timing for the regulation and FULs soon.

Recent AAC Developments

In this period of transition in federal policy, some states have opted to wait for the final federal regulation and FULs before modifying their own policies. Othershave moved forward with AAC methodology transitions.

In 2011, both California and New York passed legislation requiring their Medicaid programs to transition to an AAC-based prescription drug reimbursement methodology. For various reasons, both states have opted to put a hold on these implementation efforts.

New York’s Department of Health (DOH) began the transition process in the typical manner, contracting to develop both AAC rates and a state-specific COD. However, as results from this work became publically available, the DOH experienced significant pushback from both state and national pharmacy associations. These associations argued that the DOH’s determined mean COD was too low, and subsequently were successful in lobbying the state legislature to revoke the Department’s authority to implement an AAC methodology on April 1, 2014.

Outstanding Issues for States

There are a variety of issues the states face as they await CMS action to finalize AMP-based FULs. Foremost among these is the potential operational steps states must take as they choose whether to implement the new FUL methodology in their prescription drug reimbursement policies. NAMD submitted a letter to CMS discussing these issues and potential solutions to ease the transition process last September.[7]Appendix A includes a flow chart developed by the state of Iowa which reflects the questions and processes which many states will need to work through.

In particular, states which choose to incorporate the new federal FULs into their methodologies need to determine which FUL format to use (the monthly file or the 3-month rolling average file), to implement an override process to adjust reimbursement to providers when acquisition costs don’t align with the reimbursement benchmark, and time to develop internal mechanisms, policies, and processes to reflect these changes.

For states that opt not to incorporate the new FULs into their methodologies, time for development and approval of a state plan amendment must be accounted for. How these states’ chosen reimbursement methodologies interact with the new FULs must also be accounted for. States using AWP or WAC need guidance on whether the state must meet the federal FUL aggregate, what information is required in the state plan amendment, and whether CMS will provide the FUL calculation methodology. States utilizing AAC or NADAC for their reimbursement methodologies will need similar guidance.

NAMD Collaboration on National COD Survey

In 2006, the Coalition for Community Pharmacy Action (CCPA) conducted a nation-wide survey to determine national and state-specific CODs. CCPA will conduct an updated version of this survey and analysis this year. NAMD is partnering with CCPA in this effort by involving interested Directors, Pharmacy Directors, and other staff in developing the survey methodology and identifying areas of interest for subsequent analysis. The CCPA survey is expected to be distributed in mid-May, with preliminary results in August and a final report in October.

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[1]“Review of Drug Costs to Medicaid Pharmacies and Their Relation to Benchmark Prices,” HHS OIG Report A-06-11-0002, October 2011.

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[4]42 CFR § 447.512

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