Generic Pileup: New Releases, Medicaid Changes on Collision Course

Generic Pileup: New Releases, Medicaid Changes on Collision Course

“Hundreds of supermarket pharmacies offer reduced-price generic drug programs. Some chains have free generic drug programs for low-income consumers. These programs save consumers significant amounts of money and allow uninsured and underinsured individuals and patients on fixed incomes access to vital, generic drugs." — Cathy Polley, VP, health and wellness, FMI

The patent cliff is here.

With it comes an onslaught of blockbuster brand-name drugs whose market exclusivity runs out, thus clearing the way for significantly lower-price prescription drugs which represent newfound revenue and profit for retail pharmacies and billions in health care savings for their patients.

At the same time as this new wave of generics hits the market, other events are transpiring that could threaten generic dispensing and pharmacy revenues.

Those events are part of the very complex health care system that is presently undergoing a transition under the Affordable Care Act (ACA) of 2010 of which the law’s constitutionality is now being challenged in the Supreme Court.

While that debate continues, implementation of parts of the law is proceeding.

Retail pharmacy associations are on alert with proposed changes to how retail pharmacies are reimbursed for generic drugs through Medicaid, which represented $20.5 billion in prescription drug expenditures for all beneficiaries in 2007, according to government statistics.

Changes to Medicaid reimbursements could cut into generic profits.Generics play an important role in curtailing rising drug costs for states that support Medicaid beneficiaries. 

Outside of state and federal programs to aid healthcare recipients, many retail pharmacies have become low-cost providers of generic medications in an effort to drive traffic and market share.

Food Marketing Institute’s Cathy Polley, vice president for health and wellness and executive director of the FMI Foundation, pointed to the generic discount programs that many members now offer, following Wal-Mart [1]’s rollout in 2006 of its $4, 30-day generic program.

“Each day, hundreds of supermarket pharmacies offer $4-a-month or reduced-price generic drug programs. Some supermarket chains have free generic drug programs for low-income consumers. These programs save consumers significant amounts of money and allow uninsured and underinsured individuals and patients on fixed incomes access to vital, generic drugs,” she said.

Generic utilization will become more critical if the ACA becomes fully implemented in 2016. At that point, some 16 million new people are expected to enter the Medicaid ranks, and another 16 million people are to become insured under the law’s individual mandate.

A majority of Medicaid prescriptions dispensed, about 69%, are lower-cost generics, which represent just 20% of total Medicaid drug expenditures. Higher-cost brand name drugs makeup 80% of total Medicaid drug expenditures.

“We estimate that for every 1% increase in generic dispensing in Medicaid it would save nearly $600 million annually. So the most effective way to control prescription drug spending is through increased generic utilization,” said Julie Khani, vice president, public policy for the National Association of Chain Drug Stores.

 

New Generic Entries

Given the coming demand and pressures to curb health care spending, the timing seems perfect for an unusually large number of brand-name drugs to shed their patents in the next five years. Drug manufacturers are granted 20-year market exclusivity on their drugs.

This year alone some 26 drugs are expected to lose their patents, according to estimates compiled by Medco Health Solutions. The five biggest dollar volume drugs generating over $1 billion are ready to make the conversion within the next few months.

Lexapro, a $2.5 billion anti-depressant from Forest Pharmaceuticals, made the conversion on March 14.  Seroquel, which treats schizophrenia and bipolar disorder, is expected to fall off the cliff this month. It generated $3.5 billion for AstraZeneca in 2010. Plavix, a $5 billion anti-clot blood thinner from Bristol-Myer, is up in May. Singulair, the $3.8 billion asthma/allergy drug from Merck, and Actos, the $2.9 billion type 2 diabetes drug from Takeda, are due to expire.

These five drugs represent sales of roughly $13 billion in the U.S. This year alone an estimated $33 billion worth of brand-name drugs are expected to lose their patent protection, according to IMS Health. That figure is expected to grow to about $90 billion within the next several years, close to a third of the annual spending on all prescription drugs in the U.S., researchers estimate.

Generic drugs represented $78 billion in U.S. sales in 2010 and accounted for 78% of all retail prescriptions dispensed, according to IMS Health.

The falloff in revenue volume from branded to generic sales is steep. On average, more than 80% of a brand’s prescription volume is replaced by generics within six months of a patent loss, reports IMS. This means steep drops of as much as 75% in generic drug pricing from the brand-name drug. This is driven by fierce market competition among generic drug manufacturers.

While this will decrease the overall prescription dollar sales volume for retail pharmacy, it also can yield bigger profits per prescription through competitive pricing spreads from third-party reimbursement and the net acquisition cost.

The importance of the generic market for retail pharmacy is evident in big chain quarterly reports.

As Walgreens’ Chief Financial Officer and Executive Vice President Wade Miquelon noted during the drug chain’s first quarter earnings call: “Beginning with the Nov. 30 [2011] launch of atorvastatin, the new generic version of the brand Lipitor, we expect to benefit from acceleration in the rate of introductions of new generics, which should positively impact our gross profit dollar growth in the second half of the fiscal year.”

And, in the drug chain’s second-quarter call last week, Miquelon said, “We expect to benefit from a higher level of new generic introductions in the second half including expected launches of generic versions of the brands Lexapro, Seroquel and Plavix.”

But the generic bubble could burst for retail chain pharmacies yielding losses in reimbursements rather than profits under the federal government’s proposed new rule on Medicaid pharmacy reimbursement.

Calculating FULs

Of concern is the switch to a new benchmark — average manufacturer price (AMP) — used to calculate what’s called the federal upper limits (FULs), which is a cost-containing measure that sets the maximum amount a state can reimburse a pharmacy for generic drugs, explained Khani.

Historically, FULs were based on 150% of the lowest published price for the least costly, therapeutically equivalent product found in national compendia plus a reasonable dispensing fee. The lowest published price has generally been the average whole price (AWP) or wholesale acquisition cost (WAC.)

Federal policymakers were concerned that such benchmarks used in setting FULs weren’t accurately reflecting a pharmacy’s true acquisition cost.

AMP, however, has undergone scrutiny by retail pharmacy associations since it first was introduced with the Deficit Reduction Act of 2005. AMP today is supposedly defined by manufacturers’ sales to retail pharmacies and sets FULs for reimbursement of generics at a rate of no less than 175% of average weighted manufacturer price.

The fear is that AMP, which has never been used before to set pharmacy reimbursements for generic drugs, still falls short of reflecting the true acquisition drug and dispensing costs.

Khani called this a “radical change to pharmacy reimbursement.”

“We have concerns about AMP as a benchmark, which was created to determine manufacturer rebates that are paid [to states and the Federal government to offset the overall cost of prescription drugs under the Medicaid program]. So it’s not a benchmark based on sales transactions to pharmacies,” she added. 

Khani said it’s important that both components of the pharmacy cost — drug acquisition and dispensing fee — are addressed in the new reimbursement method.

“If there is a desire to pay pharmacies accurately for the cost of the drug product, it is also critically important pharmacies get paid accurately for the cost of dispensing prescriptions for Medicaid patients.

She noted that the average Medicaid dispensing fee is about $4.50, compared with about $10.50 for the average cost to dispense a regular prescription.

“Let’s make sure we get it right that we are paying pharmacies accurately for product costs and accurately to dispense. And, we are maintaining access for prescription drugs and pharmacy services for Medicaid patients.”

Final comments on the proposed rule and the six draft FUL lists using AMP, which has been calculated without regulatory guidance, are due to Centers for Medicare and Medicaid Services (CMS) today, April 2. However, Khani noted a provision of ACA allows CMS to implement the new policy before rule making is finalized.

Asked how that is possible? Khani said, “We are not sure. That’s why we have been working so aggressively not just at the federal level but also at state level to make sure Medicaid dispensing fee changes are made.”

In its comments to the proposed rule, FMI will encourage CMS to require that states demonstrate, through surveys that reflect state-based data, that their ingredient costs reimbursement and dispensing fees are reflective of pharmacy costs of dispensing.

“CMS should also require states to demonstrate that both their brand-name drug reimbursement as well as MAC (maximum allowable costs) lists for generics are justified based on state-based data, and not permit states to make reductions in these MAC lists without justification to CMS,” said Polley. While the FUL list is the maximum allowable cost that a state can reimburse a pharmacy for generic drugs, states can and do go below the FUL recommendation.

"Moreover, states should be required to demonstrate that their MAC methodology is based on community pharmacies' costs of purchasing prescription drugs, and also include a process by which such values are changed in a timely manner so that they are more transparent to the pharmacy,” Polley said.

Khani said several states are using the average acquisition cost (AAC), obtained from pharmacy invoices, to better calculate pharmacy reimbursements. CMS is also considering collecting and publishing this data as a benchmark, she said.

Only time will tell how this all plays out for retail pharmacy that services low-income Medicaid patients and the generic drug segment. While pricing accuracy, transparency and cost containment, and retail pharmacy access remain goals, it may not be so easy to cut through the many layers of rules and special interests to achieve those goals.

The one sure fact is that generic medication utilization has brought health care costs down, and saved the system $734 billion over a decade (from 1999-2008), according the Generic Pharmaceutical Association.    

 

Yet Another Reimbursement Metric: AAC

Getting to the true pharmacy drug acquisition cost is not an easy task when it comes to third-party reimbursements for generic drugs.

States for over a decade have used the average wholesale price (AWP), a price published by drug manufacturers, to determine reimbursements to retail pharmacies. However, AWP is thought to be faulty and not reflective of the true acquisition cost.

In an effort to cut costs on reimbursements on Medicaid, Alabama and Oregon have turned to average acquisition cost (AAC) in determining their Medicaid reimbursements. AAC is a benchmark said to more accurately reflect the cost of generic drugs to retail pharmacies. Under this method, states request invoice data from pharmacies to calculate the AAC.

However, this measure, which is now under consideration by the Centers for Medicare and Medicaid Services (CMS), is being questioned by independent retail pharmacists who claim they pay higher prices than large retail chains and that the average cost means independents will be reimbursed at a lower price than they pay for the drugs.

“The devil you know is better than the devil you don’t,” John Coster, government affairs director for the National Community Pharmacists Association, told Stateline, a news service of the Pew Center on the States, that reports on state policy.

“We have grave concerns about [Alabama’s] average acquisition cost model and how it’s determined.”