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Why Does 15% Equal 50%?
Understanding the Financial Impact of Generic Drug Pricing
With PACE programs operational in 31 states as of 2014, PACE is a national forerunner in all-inclusive medical care for seniors
with chronic care needs. As PACE continues to expand its national outreach, it has an opportunity to demonstrate its value
and care in the face of impending healthcare expenditure issues. PACE organizations strive to improve patient outcome and
reduce costs to ensure long-term sustainability for both its patients and its funding sources.
Because PACE programs aim to improve the quality of life for its members while also managing rising health care costs, it is
becoming more and more crucial to balance care with fair and responsible costs. This white paper will introduce the serious,
long-term problem of medical spending, highlight PACE’s role in the situation, and explain why Pharmacy Benefit Managers
(PBMs) like Pharmastar are integral to finding a long-term solution.
The Problem of Medical Spending
As the population of older Americans is expected to double by 2030, rising levels of health care spending pose a challenge for
both PACE’s patients and the government’s two primary health insurance programs: Medicare and Medicaid. Here are some
important facts concerning medical spending from the Congressional Budget Office:
• Federal spending for Medicare and Medicaid rose from 1.8% of gross domestic product (GDP) in fiscal year 1985 to
4.6% in 2012.
• Total national spending on health care services and supplies increased from 4.6% of GDP in 1960 to 9.5% in 1985 and to
16.4% in 2011
• Net federal spending for Medicare and Medicaid will rise from an estimated 4.6% of GDP in 2013 to 8% in 2038,
essentially doubling the spending.
These monumental cost increases pose serious threats to the sustainability of these government programs, as well as the
health care providers like PACE that rely on their funding. Unless careful action is taken, PACE programs run the risk of being
under considerable financial strain in the near future.
On average, health care spending per person has grown faster than the nation’s economic output since 1985. Because the
growth of health care spending cannot exceed economic growth indefinitely, responsible parties must limit their health care
spending in order to sustain these vital programs. As PACE (with the aid of Medicare and Medicaid) pays for all necessary
prescription and non-prescription drugs, it is critical that the discounted costs of those prescriptions be carefully analyzed
to gain both short-term and long-term benefits for the PACE program. While it might be hard to compare the costs of
PACE members to other Medicare members, one cost is very easy to benchmark and compare: the discount received on
prescriptions under the Medicare Part D benefit.
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Generic Drug Pricing Games
Often times, PACE organizations are grouped together with standard Medicare Part D plans, but there are some important
differences. Where typical Medicare Part D plans only focus on the pharmaceutical care of their members, PACE plans are
charged with the overall care of
their members, including medical,
$50,000
pharmaceutical, emotional and
social issues. While this leads to
exceptional care for the members,
$40,000
70%
it can be an overwhelming task for
discount
PACE organizations to coordinate
this amount of care. To help
$30,000
65%
control costs, many PACE plans
discount
contract with a single pharmacy
$42,267 $49,312
to coordinate the dispensing of
$20,000
their members’ medications. This
partnership between a plan and a
pharmacy can be beneficial to both $10,000
$19,305 $22,522
the plan and the members, but
$9,855
there are other issues to consider
0
to assure cost efficiency.
MAC
AWP #1
AWP #2
There are several pricing
schedules for medication reimbursement to pharmacies. Average Wholesale Price (AWP) and Wholesale Acquisition
Cost (WAC) prices are set by the drug manufacturers. Although AWP and WAC have a strong correlation to the price that
pharmacies pay for brand name medications, the same is not true for generic drugs. WAC is a good price basis but most generic
drugs don’t have a WAC price point because the manufacturer might not establish one.
To understand the impact of these pricing models in the market, there are a few key points PACE plans should understand.
• There is no correlation between what a pharmacy pays for a generic drug and AWP.
• Because more than one manufacturer can produce a generic drug, there can be multiple AWPs for one generic drug.
If a pharmacy is reimbursed based on the AWP for a generic medication, they can maximize their reimbursement by switching
to higher AWPs. Ultimately, this strategy is to the financial detriment to the PACE plan.
The best and most widely accepted method for the reimbursement for generic medications to pharmacies is the use of a
Maximum Allowable Cost (MAC) list. A MAC list is developed by PBMs to pay a fair reimbursement to a pharmacy based on
actual market prices for each generic drug. The MAC lists are updated monthly to reflect changes in market prices.
To illustrate these differences, Pharmastar queried the AWP prices for Simvastatin 10mg for actual 2014 adjudicated
prescription claims. The AWP prices ranged from $1.76 to $3.86 per pill. Since Pharmastar reimburses based on a MAC
price, the varying AWP prices submitted on a prescription claim do not affect the prices paid by Pharmastar clients. However,
if a PACE plan is directly reimbursing a pharmacy, the pharmacy could be maximizing its reimbursement by choosing a more
expensive AWP. The PACE plan will pay more for that generic, even though the pharmacy purchases the drug at a lower cost.
This system incentivizes the utilization of a more expensive AWP.
The chart above shows how much a PACE plan would reimburse the pharmacy for Simvastatin at the two mentioned AWPs.
Even at what would seem like a good discount rate, the PACE plan is drastically (and often, unknowingly) overspending.
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Generic Drug Reimbursement Dangers
The biggest generic pricing danger is that
a 15% change in generic discount could
actually be a 50% change in what a PACE
plan is paying for the ingredient cost of
generic drugs. How can that happen?
PACE plans should have an effective discount
off of AWP of about 70% across all of their
generic utilization. That can vary based on
the actual generic utilization, but overall,
it is pretty close to that. That means that
the PACE plan is paying .30 on each dollar.
If that effective discount goes from 70%
to 55%, that means the PACE plan is going
from paying .30 on the dollar to .45. That is
a 50% increase on what PACE was paying
before. When addressed in terms of cost
increase to the PACE program, what appears
as a harmless decimal change on paper translates into a large financial strain for PACE. For example, if a PACE plan’s effective
discount changes from 70% to 60%, there is a 33% increase in generic drug ingredient cost.
An effective discount of 70% on all of a PACE plan’s generic utilization is not the same as a 70% discount on each generic drug.
Some pharmacies may encourage a PACE plan to switch from using a MAC list that is driving a specific overall discount to that
discount on each drug. However, that is not matching pricing, and the PACE plan could end up paying a lot more, especially if
that pharmacy is using generic drugs with higher AWP prices.
These percentages seem trustworthy on the surface, but the story changes as hard numbers are applied to the change in
discount. For every discount point of AWP for PACE plans, it is worth $0.73. If a PACE plan gives up 15% in discount, that is
$10.95 average on every generic prescription. Based on the average PACE plan utilization, that would be over $128 a month
or $1,536 a year in over-reimbursement to the pharmacy per member. These are often unnecessary reimbursements. With the
help of PBMs like Pharmastar, PACE plans can begin to engage in better pharmacy cost management.
The Solution
Understanding the impact drug pricing might have on your organization is an important first step. However, moving from
understanding to action can be confusing and intimidating. There are several questions every PACE plan can ask to better
understand their current drug pricing situation and if they are implementing the most optimal strategy for their organization.
• Are the discounts in my pharmacy contract based on the fair market value?
• Are generic drugs reimbursed based on a MAC or AWP basis?
• Are the contract terms with your pharmacy similar to the average PACE plan rates?
• On average, manufacturer drug rebates reduce drug expense by about 5%. Is your PACE plan receiving a similar amount?
• If your PACE plan is paying for generic drugs based on discounted AWP, how do you know the pharmacy isn’t buying
generic drugs with the highest AWP price?
As you begin to explore the circumstances of your PACE plan’s drug purchasing strategy, you may find that there are significant
opportunities for you to improve your overall spend on prescriptions.
If you have questions on the ideas or questions raised in this white paper, Pharmastar is available to provide you with guidance
and additional information, including an analysis of your current prescription drug costs to identify savings opportunities.
Give us a call to learn more today.
pharmastarpbm.com
888.298.7770