Medicare Compliance & Reimbursement

Beware final rule for Medicaid payments.

If your revenue includes Medicaid payments, read the fine print of a rule released this month: The survival of your business may depend on it.

On July 6, the Centers for Medicare & Medicaid Services (CMS) took its latest step toward steep cuts in what Medicaid will pay for generic drugs by issuing the final rule "Medicaid Prescription Drugs: Average Manufacturer Price." The agency called the move an effort to control "inflated drug payments" to pharmacies.

Community pharmacists are likely to hear that claim as a call to arms, experts say.

"The rule can't be good for retail pharmacies," says John Coster of the National Association of Chain Drug Stores, commenting on the rule soon after its release.

Background: The regulation, mandated by the Deficit Reduction Act (DRA) of 2005, implements a new method of setting federal upper limits (FULs) on what the federal government will reimburse state Medicaid agencies for prescription drug payments. The new method for setting FULs rests on the rule's revised definition of "average manufacturer price (AMP)," the measure by which states calculate Medicaid reimbursement for drugs.

Hit hard: Independent pharmacies are likely to feel the cuts the hardest, says the National Community Pharmacists Association's (NCPA) Charles Sewell. Retail chains are also subject to the cuts, but independents often have a higher percentage of Medicaid beneficiaries.

If pharmacists are forced to close their doors or shorten their hours, beneficiaries could face serious problems getting their prescriptions filled. "This system will be an absolute disaster," predicts Sewell.

Related risk: A policy that would slash what Medicaid pays pharmacists for generic drugs ultimately could affect what Medicare Part D and other payers ante up for generics.

Devil Is In The Details

The problem, pharmacy groups say, is that the new method for calculating average generic drug prices includes special discounts manufacturers offer to mail-order pharmacy services, hospitals and other buyers, but not traditional drug stores. As a result, the price of some medicines calculated under the new policy
is actually below what it costs pharmacies to purchase them.

The Government Accountability Office (GAO) contends that some pharmacies will lose money for generics dispensed once the new formula takes effect. Based on earlier drafts of the rule, the GAO estimates payments to pharmacies would fall 36 percent below what they actually pay to buy the drugs.

CMS calls the GAO's method for calculating pharmacy expenses flawed, saying the government has been overpaying pharmacists for generic drugs under the previous system.

"This new calculation method will allow Medicaid to pay more accurately for the medicines enrollees need," said CMS acting administrator Leslie Norwalk, in a prepared statement.

Ray of hope: In what could bring some relief for independent pharmacists, CMS said in releasing the rule that it is "actively encouraging states to evaluate whether other fees they pay pharmacies are adequate to compensate them for their costs in dispensing the prescription."

The final rule provides for a new definition of "dispensing fees," which cover a pharmacy's costs of dispensing the drug, including overhead.

To adjust dispensing fees, state Medicaid programs must submit a state plan amendment for federal approval. Dispensing fees receive a full federal match and are not limited by the new FULs.

What To Do: Comment Now For Fairer Payments

Although CMS published the regulation as a final rule, the agency has asked for stakeholders' comments in two areas:

• The so-called "outlier policy" that eliminates from AMP calculations any drug in an FUL that is priced significantly lower than other drugs in that category and
• The definition of AMP.

"[The comment period] will allow CMS the benefit of further public comment as actual AMP numbers become available and the FULs are developed," the agency said in its press release.

Interested parties will have 180 days from the rule's Federal Register publication to submit comments.

Timeline: Most provisions of the rule will take effect on Oct. 1, 2007. CMS will respond to comments on the two provisions noted above and publish a final rule on those provisions at a later date.

To view the rule, go to www.cms.hhs.gov/MedicaidGenInfo/Downloads/CMS2238FC.pdf or
to www.cms.hhs.gov/MedicaidGenInfo/08_Medicaidregulations.asp.