RD288 - Special Report on the Analysis of the Fiscal Year 2008 Fiscal Impact of the Implementation of “Average Manufacturer Price” - November 1, 2008


Executive Summary:
The Deficit Reduction Act (DRA) established a new Federal Upper Limit (FUL) calculation, which represents the maximum the federal government will pay to states in federal matching funds for multi-source drugs (generics) dispensed through state Medicaid programs. The FUL is one of four different pricing methodologies used to reimburse pharmacies for prescription drugs in Virginia’s Medicaid program. The new FUL was to be calculated at 250% of the lowest Average Manufacturer Price (AMP) in a generic drug class. The AMP is a calculated price which more accurately represents the price that a pharmacy pays to acquire a drug.

The DRA changes were prompted by a series of 2004 reports by both the Government Accountability Office (GAO) and the HHS Office of the Inspector General (OIG) showing that Medicaid payments to pharmacies for generic drugs were higher than what pharmacies were actually paying for those drugs. The GAO and OIG found that states were overpaying for drugs because they were using commercial drug pricing guides as the basis for setting state reimbursement levels. The investigation of these drug price “compendia” documented that these prices were artificially inflated, especially for generic drugs.

One goal of the DRA was to encourage states to pay pharmacies more appropriately for the estimated acquisition cost of generic drugs. Prior to the DRA, actual drug prices were considered proprietary information and were only used by the Centers for Medicare & Medicaid Services (CMS) to calculate rebates; even CMS was prohibited by law from disclosing AMPs.