Legislative Threats to Maximum Allowable Cost Programs

Special interest legislation could inflate generic drug prices.

A federal district court upheld a challenge made by the Pharmaceutical Care Management Association (PCMA) in its lawsuit, PCMA v. Rutledge. The court agreed to hear PCMA’s allegations that a new state law, Arkansas 900, forces employers and patients to pay drugstores higher prices for generic drugs. The trial is scheduled for the week of December 5, 2016.

Opponents describe Arkansas 900 as a piece of special interest legislation that will inflate generic drug prices and promote pharmacy profits over public welfare.

Like similar measures in other states, the bill undercuts the purpose of maximum allowable cost (MAC) programs by requiring pharmacy benefit managers (PBMs) to reimburse pharmacies no less than their invoice cost to acquire generic drugs. A white paper published by an expert witness for PCMA explains that, in effect, this “cost-plus” system hands pharmacies a guaranteed profit and eliminates their incentive to shop around for the best wholesale generic price.

Background on the Evolution of MACs

Author David Hyman explained that payers developed MACs to avoid overpaying for generic drugs, which now account for 86% of prescription fills in the United States.

Prior to MACs, payers used to reimburse pharmacies based on the list price of a drug. For many reasons, however, the list price was found to exceed the actual cost to pharmacies. In many cases, pharmacies are able to acquire generic drugs for 20% to 95% off list price.

Hyman explained that even invoice prices do not necessarily reflect a pharmacy’s actual acquisition cost, because invoices often do not reflect rebates, charge-backs, or discounts given to the pharmacy. New legislation to base PBM reimbursements on invoice price will only make this matter worse, certainly driving pharmacies to maximize profits by striking more and more discount arrangements off-invoice.

This is why maximum allowable cost programs began in the first place. In 1987, Medicaid began reimbursing pharmacies a flat amount for certain drugs, rather than the acquisition cost. Fearing that these computed flat prices still were too high, many state Medicaid programs adopted MAC programs, leading the move toward a system of reimbursement based on the average actual acquisition cost of an efficient pharmacy. This gave pharmacies a profit motive to control acquisition costs and keep the difference. PBMs followed suit with their own MAC programs, and now this system is common practice.

The author noted there are many good reasons to believe that MAC programs aren’t broke and don’t need fixing: (1) They encourage generic use; (2) They promote competition among generic manufacturers; (3) They ensure pharmacies are not overpaid; (4) They lower spending on drugs and drug benefits; and (5) They simplify reimbursements, eliminating individualized assessments of acquisition costs and making transactions more efficient.

What are the Current Threats to MAC Programs?

The white paper explained that like similar legislation in other states, Arkansas 900, “places limits on when a pharmaceutical can be placed on a MAC list; requires PBMs to update their MAC lists on a periodic basis and make those lists available to pharmacies; and specifies an administrative appeals process that must be made available to pharmacies that are dissatisfied with the amount they were paid pursuant to a MAC.”

It also entitles a drugstore to refuse to fill a patient’s prescription because of unsatisfactory reimbursement. These measures are in addition to the new cost-plus reimbursement system already described.

To see the inflationary effects of a cost-based system, one only has to look at the federal government’s military spending under such a reimbursement structure, the author said. Defense contractors like Halliburton commonly spent over budget, knowing that their costs would always be reimbursed, no matter how high.

What Prompted this Legislation?

Proponents of Arkansas 900 say these measures were needed because under the current system, pharmacies have been filling some prescriptions at a loss, especially considering the unreflected cost of overhead. The Arkansas Pharmacists Association conducted a survey of its members who reported 11% of prescriptions were being reimbursed below acquisition cost. One pharmacist claimed he supplied pain patches for a dying patient with cancer at a loss of $60 per month.

The professional association alleges that PBMs pay drugstores one price and charge payers another, profiting on the spread. Pharmacists argue that a current lack of PBM transparency prevents drugstores from successfully challenging inadequate reimbursements.