Update on Generic Dispensing Margins: Even Ahead of the CMS Final Rule, AWP is no Longer the Prevailing Medicaid Standard


HHS OIG* on August 30 published a survey of the benchmarks states use to determine ingredient-cost reimbursement for Medicaid prescriptions. Of the 43 states identifying their benchmarks, 30 are using the newer Average Acquisition Cost (AAC) reference; only 11 are using either (Wholesale Acquisition Cost (WAC) or Average Wholesale Price (AWP) (the outgoing ‘legacy’ references) without also using AAC

Thus well ahead (the survey, published last month, was mailed in January of 2012) of CMS** publication of a final rule compelling the shift from AWP to AAC, AAC is the de facto Medicaid pricing benchmark

The states using AAC had ingredient cost reimbursement levels that were on average 11pct lower than for states that did not use AAC; thus in addition to the practical matter of essentially having to switch as CMS shifts the benchmark, states not yet on AAC have a financial incentive to join the others

Why we care: With the majority of states having shifted to AAC, and the remainder almost certainly compelled to do so by the final rule (now due in January), retail pharmacy information systems across the nation must soon be loaded with the new AAC standard. This, for the first time, makes AAC practically available to commercial plan sponsors as a benchmark for their pharmacy benefit contracts. We expect these sponsors to shift their pharmacy benefit contracts to AAC as early as they can. Large sponsors have both the foresight and leverage to force AAC into renewing and even some existing contracts; smaller sponsors are likely to soon follow

Because AAC tracks actual generic costs closely, where AWP does not, we expect AAC to dramatically narrow the generic dispensing margins that AWP has enabled in commercial contracts – as it already has in Medicaid

PBMs (ESRX much more than CTRX) are most negatively affected, followed by drug retailers (CVS more so than WAG) and drug wholesalers (ABC most, followed by CAH, then MCK)


For our full research notes, please visit our published research site.

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