Replacing Average Wholesale Price: Medicaid Drug Payment Policy (OEI-03-11-00060)

Of the 45 States that used average wholesale price (AWP) to set reimbursement for prescription drugs in the first quarter of 2011, 20 States did not have definitive plans for prescription drug reimbursement after First DataBank stops publishing AWPs in September 2011.

Federal regulations require that Medicaid reimbursement amounts for prescription drugs not exceed the lower of (1) the estimated acquisition cost plus a dispensing fee or (2) the provider's usual and customary charge to the public for the drug. CMS allows States flexibility in determining the estimated acquisition cost. Most States estimated the acquisition cost based on AWP; many of these States obtained AWP data from the pricing compendium published by First DataBank. Following a lawsuit, First DataBank decided to stop publishing AWPs no later than September 26, 2011. We sent surveys that asked States to describe how they intend to set reimbursement after First DataBank stops publishing AWPs and to describe the role they would prefer CMS play in developing Medicaid reimbursement methodologies. We also interviewed CMS staff to determine whether the agency had provided guidance to all States regarding recent AWP issues.

Of the 45 States with AWP-based reimbursement methodologies, 3 had developed plans to replace AWP with average acquisition cost, 12 to replace AWP with wholesale acquisition cost, and 10 to use AWP from a source other than First DataBank. Most States (44 of 51) would prefer that CMS develop a single national benchmark to set Medicaid reimbursement rates, and 24 of these States specifically wanted a benchmark based on pharmacy acquisition costs. Based on our interview with CMS staff, the agency has not yet provided uniform guidance about options for Medicaid reimbursement after AWPs are no longer available from First DataBank, but is taking steps to address this issue and plans to provide guidance to States in the future.

First DataBank's plan to cease publication of AWPs has forced many States to reevaluate how they will pay for prescription drugs and presents them with the opportunity to move to new reimbursement methodologies that could better reflect pharmacy acquisition costs. Therefore, we recommend that CMS develop a national benchmark that accurately estimates acquisition cost and encourage States to consider it when determining Medicaid reimbursement for prescription drugs. CMS concurred with our recommendation.

Dallas L Alford IV, CPA is a licensed Certified Public Accountant in the state of North Carolina and owner of Atlantic Financial Consulting, a consulting firm that provides comprehensive medical billing services, practice management consulting, coding audits, Medicare compliance, Medicare RAC support and other general medical practice consulting services.

To learn more about Atlantic Financial Consulting you may visit their website at

http://atlanticfinancial.us  or contact Dallas L Alford IV, CPA directly at 1 888-428-2555, Ext. 200.