A little-noticed provision in the health care reform law successfully concluded a sustained effort to allow community pharmacies to continue serving Medicaid patients without being squeezed to the financial breaking point.

[IMGCAP(1)]It began with 2005 legislation that led to a reduction in Medicaid pharmacy generic prescription drug reimbursement by $8.4 billion over five years. That figure was determined by a formula based on AMP, which stands for Average Manufacturer Price. But in the specific case of independent pharmacies, a more appropriate title is “Ain’t My Price.”

The specific provision enacted last month restored some of those cuts thanks to the bipartisan Congressional support of Members such as Sens. Max Baucus (D-Mont.) and Chuck Grassley (R-Iowa) and Reps. Marion Berry (D-Ark.), Jo Ann Emerson (R-Mo.), Cathy McMorris Rodgers (R-Wash.), Jerry Moran (R-Kan.), Frank Pallone (D-N.J.) and Anthony Weiner (D-N.Y.), along with the Congressional Community Pharmacy Coalition, the Congressional Black Caucus, the Congressional Hispanic Caucus and the Congressional Asian Pacific American Caucus.

Those efforts were manifested by introducing stand-alone bills to address the problem, including a moratorium on implementing AMP, in the Medicare Improvements for Patients and Providers Act of 2008. And letters of support for fair reimbursements were sent by Members of Congress to the Congressional leadership and implementers of AMP — the Centers for Medicare and Medicaid Services.

An unintended consequence of AMP is that it hurts the largest provider of Medicaid patients the most: independent community pharmacies. Often located in underserved rural and urban areas with limited health care options, independent pharmacies receive an average of 15 percent of their revenue from serving Medicaid recipients as opposed to 7 percent for national chain pharmacies such as CVS Caremark. Unfortunately, independent pharmacies can least afford the cuts since prescription drugs compose an average of 93 percent of their total revenue, far more than national chain pharmacies. 

These concerns gained additional credibility in December 2006. That’s when a Government Accountability Office study determined AMP would pay pharmacies on average 36 percent less than what it costs the pharmacy simply to acquire prescription drugs, not accounting for overhead or other costs of dispensing.

Then CMS actually went beyond the scope of the law in issuing a final rule in July 2007. The formula included bargain prices paid by mail-order pharmacies, hospitals, clinics, various outpatient facilities, physicians and home health care providers that were not available to independent or chain pharmacies. As a result, the formula was skewed and the cuts were further exacerbated.

In response, the National Community Pharmacists Association and National Association of Chain Drug Stores filed a joint, successful lawsuit asking U.S. District Judge Royce Lamberth to issue a stay preventing AMP’s implementation from occurring in early 2008. Included in the brief was a study by Dr. Stephen Schondelmeyer from College of Pharmacy at University of Minnesota with the analysis:

“Reduction in payments will result in substantial loss, and even closures, for a number of pharmacies. In total, the loss of 20 percent of all retail pharmacies would not be unexpected from payment cuts of the magnitude that will result from the final rule. If a similar proportion of all types of retail pharmacies is affected, the retail pharmacy market may see the loss of 10,000 to 12,000 pharmacies (the vast majority of which would be pharmacies in rural or inner city urban areas and with high Medicaid volumes) over the next few years.”

AMP’s biggest “good governance” flaw is that initial savings would be wiped out by back-end expenditures. Pharmacists conducting a cost-benefit analysis might limit participation in or drop out of Medicaid altogether in order to remain in business. That would undercut patient access to prescription drug services. Those patients in turn wind up in more expensive emergency rooms or doctors’ offices, or worse, being hospitalized because they no longer get the effective medication adherence that clinically trained pharmacists offer. 

Thankfully, those worst-case scenarios were avoided by including the AMP provision in the Patient Protection and Affordable Care Act. It removed just about all of the unavailable price forces that brought down the reimbursement formula. It is now based on “no less than 175% of the weighted average AMP,” according to language in the bill. Our next battle is the Medicaid dispensing fees in the states, but that’s another story, and we can be comforted by the fact that local pharmacists will get reimbursed for generic drugs at a fair rate from the federal government. The real winners of this outcome are not just Medicaid patients, but entire communities where local pharmacies remain viable.

Bruce T. Roberts is executive vice president and CEO of the National Community Pharmacists Association.