October 26, 2009 - Pharmacies nationwide, including those participating in the 340B program, expect to see their margins shrink with the settlement of two federal court cases involving First Data Bank and Medi-Span. The pharmaceutical drug price publishers were accused of having inflated prices on hundreds of drugs for more than four years.
Under the settlement between the companies and a number of labor union medical benefits funds and other third-party payers, First Data Bank and Medi-Span are recalculating published average wholesale prices (AWPs) for about 1,450 national drug codes involving more than 400 drugs.
On Sept. 26, the two companies reduced the markup on wholesale acquisition cost (WAC) they had used for years to calculate published AWPs for as many as 7,000 drugs from 25 percent to 20 percent. Under the settlement approved by U.S. District Court Judge Patti Saris in March 2009, they must also cease publication of AWP data by March 2011.
Most state Medicaid programs base their Medicaid pharmacy reimbursement rates on a discount off the published AWPs in question.
Pharmacy groups sued over settlement
When First Data Bank and Medi-Span reduced the published AWP last month, states were required by federal law to adjust reimbursement rates accordingly. On Sept. 30, the National Association of Chain Drug Stores (NACDS) and the National Community Pharmacists Association (NCPA) filed suit against the states of California, Minnesota, New York, and Washington, accusing the states of failing to act to prevent pharmacies from being reimbursed at below cost for prescription drugs under the Medicaid program.
The pharmacy groups also alleged that the Medicaid programs needed approval from Centers for Medicare & Medicaid Services and had to give public notice before changing reimbursement levels.
"Independent community pharmacies frequently serve urban or rural areas where a disproportionate share of Medicaid beneficiaries live," noted NCPA Chief Executive Bruce Roberts. "In some of these communities, the pharmacy is the only health care provider for miles around. Left unchecked, these unfair cuts could push some community pharmacies to the breaking point."
According to NACDS, payments to pharmacies will drop by $350 million annually if state Medicaid programs do nothing to adjust pharmacy reimbursement formulas.
What will it cost 340B pharmacies?
Although payors use AWP when setting reimbursement rates, the retail pharmacies insist that AWP is rarely involved in the negotiation of sales prices between pharmacies and suppliers. Therefore, the anticipated decline in reimbursement will not be accompanied by a drop in the acquisition cost of drugs, they say.
It's also clear that the acquisition costs for 340B covered entities — based on the much lower average manufacturer price (AMP) — will not be affected.
On the other hand, 340B pharmacies that elect to "carve out" their Medicaid drugs from the 340B program will find their Medicaid payment margins diminished.
Judge: Pharmacies were "unjustly enriched"
NACDS and NCPA — along with the Food Marketing Institute, representing the grocery industry, and PCMA, the trade association representing pharmacy benefit managers — challenged the First Data Bank and Medi-Span settlement during a 2008 fairness hearing. But Judge Saris rejected their claims.
The pharmacies and other objectors "were unjustly enriched when drug prices were fraudulently inflated during the scheme, yet they have not been asked to disgorge their profits," the judge wrote. "None of the pharmacies protested the windfalls they received when prices were unilaterally inflated by five percent."
The pharmacy associations appealed the judge's denial of their request for a delay. That appeal was rejected on Sept. 3, when an appeals court agreed with Judge Saris that the pharmacies had had adequate time to prepare for the rollback.
In their lawsuit against First Data Bank and Medi-Span, a number of union health plans and Blue Cross Blue Shield of Michigan, alleged that the companies fraudulently conspired to increase prices on popular medications by increasing the markup used in reimbursement.
The drugs included Lipitor, Claritin, Prozac, Nexium, Plavix, Allegra, Wellbutrin, Ambien, Prilosec, Zantac, Valtrex, Zyprexa, Celebrex, Imitrex, Risperdal, Seroquel, and Neurontin.