In the Deficit Reduction Act (DRA), Congress made a series of significant changes to pharmaceutical pricing, Medicaid best price rebates, and Medicaid payments to pharmacies for prescription drugs. The new policies, which are expected to save the feds and states $8.4 billion over the next five years, create major challenges to both pharmaceutical manufacturers and pharmacies.

DRA Drug Pricing Changes in a Nutshell:

While the DRA has many moving parts, in general the new policies will:

1. Drive more Medicaid drug spending toward generics and reduce the market advantages of authorized generics.

2. Make Average Manufacturer Price (AMP) - a key measure of drug prices in the marketplace and the metric used in determining Medicaid rebates - transparent to the public. Previously, AMP was confidential and known only to government officials.

3. Lower AMP on many prescription drugs, putting drug makers under increased cost pressures and increasing Medicaid rebates to states.

4. Increase the compliance risks of drug manufacturers.

5. Reduce Medicaid reimbursement to pharmacies.

6. Put another nail in the coffin of Average Wholesale Price (AWP) by moving Medicaid pharmacy reimbursement systems from AWP to AMP.

Federal Proposed Rules:

Today, the Centers for Medicare and Medicaid Services (CMS) released proposed rules on implementing the DRA drug pricing policies. Final rules are expected in June 2007.

However, because key provisions are effective on January 1, 2007, pharma companies must come into compliance based on incomplete guidance and be prepared to make major changes again this summer.

DRA Changes to Average Manufacturer Price (AMP) and Medicaid Best Price:

The law requires significant changes to how drug manufacturers calculate Average Manufacturer Price (AMP) and Medicaid Best Price (BP), reducing the market power of some key price concessions used by manufacturers:

Drug manufacturers must report AMP on a monthly basis starting January 2007. More importantly, average manufacturer prices on all drugs will publicly posted on CMS' website starting Spring 2007 after CMS resolves some data and systems issues. Previously, reporting was quarterly and confidential by law.

DRA also mandates significant changes to the federal upper payment limit (FUL) for multiple source drugs. The feds are widening the definition of what is a multiple source drug and setting FUL at 250% of AMP. Previously, FUL was set at 150% of the Average Wholesale Price (AWP). This will further increase pricing pressure on brand drugs when generics are available.

Operational Challenges of DRA for Pharmaceutical Industry:

The drug industry faces many practical, operational challenges in meeting the new requirements for 2007:

1. Incomplete federal guidance. Until the final rules arrive, the drug industry must implement the DRA changes with limited federal guidance. Key factors still unclear include class of trade designations, treatment of administrative and service fees, adjusting for lagged price concessions and returned goods, correcting and restating AMP, and a variety of baseline AMP issues.

2. Moving from quarterly to more complex monthly reporting, plus adjusting for each month's transactions.

3. Adapting data, systems, staff, and reporting to accommodate different pricing methodologies required by CMS. For example, calculating and reporting AMP under Medicaid vs. calculating and reporting Average Sales Price (ASP) under Medicare Part B.

Financial Challenges of DRA for Pharmaceutical Companies:

The new DRA policies also pose significant financial challenges for pharma companies. For example:

Compliance Challenges of DRA for Drug Manufacturers:

The DRA changes present new or expanded compliance challenges for drug manufacturers. Given the frequency, changes, and overall complexity, there are many ways to inadvertently screw up federal reporting. Ensuring compliance will require heavy reliance on other parts of company and on external partners. Transparency of pricing will likely lead to new regulations, audits, and Congressional hearings. Finally, while over time DRA reporting may make it easier to defend against suits, companies should expect dramatic increase in whistleblower suits under federal and state False Claims Acts.

Learn More:

For the DRA statutory changes affecting drug pricing, click here (PDF).

For the proposed rule, click here (PDF). For CMS' fact sheet on the proposed rule, click here (PDF).

Read the OIG's recommendations to the HHS Secretary on DRA implementation issues. The OIG report includes useful background information.

For more information or a briefing, feel free to contact me.