Defines estimated acquisition cost of prescription drugs for pharmacy reimbursement

Summary of specific provisions

Section 1 of the bill amends social services law to restate pharmacy reimbursement for brand-name prescription drugs using either Average Wholesale Price or Wholesaler Acquisition Cost as the pricing benchmark. For independent pharmacies, the payment level authorized in the SFY 2008-2009 budget is maintained. For chain pharmacies, the re-stated reimbursement mechanism maintains the current payment level. Specialized HIV pharmacies are reimbursed as independents. The proposed reimburse- ment methodologies are mathematically equivalent and are therefore presented as alternatives. Pharmacy reimbursement for generic drugs is set at either the Federal Upper Limit or the State Maximum Allowable Cost, whichever is higher, eliminating the reference to Average Whole- sale Price as a benchmark. The bill makes more transparent the methodol- ogy by which the state establishes the Maximum Allowable Cost for gener- ics. When the pharmacy's usual and customary price charged to the general public is lower for either brands or generics, the Medicaid program will continue to pay at the pharmacy's usual and customary price charged to the general public. Section 2 of the bill makes the same pharmacy reimbursement changes in the EPIC program. Section 3 of the bill adds Wholesaler Acquisition Cost to pharmacy reimbursement in Elder Law. Section 4 of the bill establishes September 26, 2009 as the effective date.

Existing law

Current law sets pharmacy reimbursement at "estimated acquisition cost" which is defined to be the same for independents as for chains. For brand drugs, it is Average Wholesale Price minus 16.25%. Although state law did not change in September, 2009, payments to pharmacies dropped drastically when the value of AWP fell. On September 26, 2009, the benchmark value of published Average Wholesale Prices dropped by four percentage points thereby significantly reducing pharmacy payments for

brand drugs under the Medicaid, Family Health Plus, Child Health Plus, EPIC and the AIDS Drug Assistance Programs. Existing law allows the state to develop maximum allowable costs (MAC) for generics using the same methodology that the federal government uses to calculate its federal upper limits (FUL). When pharmacies charge the general public a lower price for either a brand or a generic drug, then the state's public programs will also reimburse at the pharmacy's usual and custom- ary price.

Justification

On September 26, 2009, First Data Bank and Medi-Span, the publishers of prescription drug price lists, agreed to lower every published Average Wholesale Price (AWP) by approximately four percentage points on nearly eight thousand prescription drug products in order to settle a federal case brought in 2001 in Massachusetts challenging published prices of 1,400 brand-name drug products. In addition to the lowering of AWP, another result of the settlement is that AWP will no longer be published after 2011. It is therefore unreliable as the basis for pharmacy reimbursement. The alternative reimbursement proposed is based on Whole- saler Acquisition Cost (WAC), and the conversions proposed from AWP-ba- sis to WAC-basis are mathematically equivalent.

Many states have adopted WAC as an alternative reimbursement benchmark, and the Congressional Budget Office considers WAC to be a more transpar- ent estimate of the price pharmacies pay for prescription drugs. Addi- tionally, the court based the recalculation of A WP on the more reliable WAC. For this reason, WAC as a reimbursement metric is increased by a percentage while AWP is always decreased by a percentage. Based on current values, AWP minus 12.25% is the same as WAC + 4.68% and AWP-16.25% is the same as WAC+.5%.

It is important to note that in the federal case the charges were against the publishers and a pharmacy wholesaler and did not include any pharmacies. A letter from the National Medicaid Directors sent to the states in September mistakenly claimed that pharmacies had been "unjust- ly enriched" under AWP reimbursement formulas since 2001, but a closer examination of the court documents reveals that the court never ruled on this issue. In fact, in the years between 2001 and 2008, New York consistently took discounts from AWP (thirteen times in fifteen years) that would have more than offset any possible "enrichment" as did the private insurance market.

In New York, pharmacies are paying a steep price for the federal settle- ment because it operationally reduced pharmacy reimbursement by four percentage points, the steepest one-time drop in history, without any offsetting decrease in inventory costs. Pharmacies were already reeling from the budget cut that had gone into effect a year earlier on July 1, 2008, which was at that time the steepest decrease ever enacted.

When compared to pharmacies in other states, those in New York are in a uniquely vulnerable position. The "carve-out" policy puts every prescription into 'fee-for-service' Medicaid reimbursement that includes

Family Health Plus and Child Health Plus as well as EPIC and the AIDS Drug Assistance Program, translating to one in five prescriptions filled in the state. In an added blow, the prescription benefit manager of the NYS Insurance Plan recently lowered its payment rates to near Medicaid levels, broadening the impact of marginal or below-cost reimbursement to one in every three prescriptions dispensed in this state because it now includes prescription filled for state and local employees and retirees.

The most urgent cry for relief from the current low payment levels comes from independently owned and operated pharmacies. Unlike large chains, independents rely almost entirely on the revenue generated from the sale of prescription drugs. Since the beginning of2008, more than three hundred independents have closed. Many more are on the brink of closing. Wholesalers report that since the fall more independents have fallen behind in their payments to wholesalers, and credit terms cannot be further extended. Quite simply, the present payment levels are not sustainable for independent pharmacies. Nearly half of the pharmacies in New York are independents, a very high percentage when compared to other states. Their presence provides clear value to the state - a more diverse statewide market and access to medicines and support services for New Yorkers living in rural communities and minority neighborhoods.

For these reasons, this bill establishes a higher reimbursement for independent pharmacies than for chains. At A WP-12.25% or WAC+4.68%, an independent pharmacy would be at the level of payment that went into effect July 1, 2008. This payment level for brand-name prescription products is still extremely low when compared to other states, especial- ly in the context of very low dispensing fees and co-payments. For chains, the bill maintains present payment level at A WP-16.25% or its equivalent WAC+.5%.

For generics, the bill would reimburse all pharmacies the same, but it introduces a modest change in the formula. Current law authorizes the New York State Health Department to establish a State Maximum Allowable Cost (SMAC) for generics using the same methodology that the federal centers for Medicaid and Medicare use to calculate Federal Upper Limits (FUL). Because DOH relies on a contractor in Michigan to calculate SMAC prices and because the methodology cannot be independently verified, the SMAC value for certain generics is below cost. As a result of unrealis- tically low reimbursement for generics, the state has unintentionally created a financial incentive for pharmacies to have a preference for dispensing branded drugs that can cost the state three or four times as much as generics. By providing greater transparency in calculating SMAC and allowing for payment at either SMAC or FUL whichever is higher, the bill sets the stage for a more reasonable payment rate for generics. This reform is designed to promote the dispensing of generic drugs, a stated goal of the Medicaid program as well as a sound cost-containment strategy for a state in financial crisis.

Without the reform and relief in this legislation, the number of pharma- cies that remain viable businesses is likely to decline further. From the state's perspective, the question is not whether independently owned

businesses survive, but rather maintaining adequate access to medica- tions through a viable network of pharmacies in locations throughout New York. When access is compromised, health declines, quality of life diminishes and health care options become more limited and healthcare costs escalate. Both independent and chain pharmacies across the state have consistently provided important services that hold other health care spending in check. As local businesses that hire locally, pharma- cies have also helped to stabilize communities by providing good and steady jobs. The financial relief this bill provides is therefore reasonable from either perspective.

Prior legislative history

This is a new bill.

Fiscal implications

To be determined.

Effective date

Immediate and shall be deemed to have been in full force and effect on or after September 26, 2009.