Alabama Medicaid drug formula could be model for other states

The method is expected to save the state millions. Oregon is awaiting CMS approval for its own version.

By Doug Trapp — Posted Nov. 2, 2010

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Alabama's new method of calculating Medicaid drug reimbursement for pharmacists is expected to save the state $30.5 million this year and could be a model for other states as they search for a replacement to a widely used formula that several state and federal courts have deemed flawed.

Alabama's new method, called average acquisition cost, is based on invoices drug manufacturers and wholesalers send to pharmacists. Previously, reimbursements were calculated by the average wholesale price, based on manufacturers' list prices that courts have said result in states overpaying pharmacies. That is the way it is still calculated in nearly all states, according to Kelli D. Littlejohn, PharmD, pharmacy director for the Alabama Medicaid Agency.

Alabama began making payments based on the new calculation on Sept. 22, about a week after the Centers for Medicare & Medicaid Services approved the state's payment model, Littlejohn said.

The state's Medicaid drug program spends about $500 million annually. More than 700,000 people, mostly children, are in Alabama's Medicaid program at any one time.

The formula change shouldn't affect Medicaid patients' access to prescription drugs, said Steve Furr, MD, president of the Medical Society of the State of Alabama. "We've already got preauthorization for certain drugs and that type of thing. ... They're just trying to get the best price they can for the drugs they're getting."

Several other states have asked Alabama about implementing the average acquisition cost formula, Littlejohn said. And Oregon could follow Alabama's move to the new payment method soon. CMS is reviewing an Oregon request to switch to the Medicaid drug reimbursement formula, said Tom Burns, director of pharmacy programs for the Oregon Health Authority.

"We recognized that we needed to get away from [average wholesale price]," Burns said. First Databank and Medi-Span will stop publishing average wholesale price by September 2011. "Everybody is going to face the same situation," he said.

Burns doesn't expect the new payment formula to reduce Oregon Medicaid enrollees' access to drugs. Though that's an issue program administrators will watch closely, he said. The state expects to save only $1.6 million on a $160 million Medicaid drug budget, but that's because the reimbursement system in Oregon is not being changed primarily to save money, Burns said, but rather to improve it's accuracy.

In Alabama, the savings the new formula is expected to generate will cut into payments to pharmacies. However, Littlejohn said the state could not have implemented the new formula without the cooperation of local pharmacists and national pharmacy associations. Pharmacy groups did not argue to keep using the average wholesale price, which Littlejohn said has been labeled inaccurate in court rulings.

Still, one national pharmacists association is reserving judgment on the average acquisition cost formula in Alabama. "It's not without its consequences and we'll just have to see how that plays out," said John Coster, PhD, RPh, senior vice president for government affairs for the National Community Pharmacists Assn. Pharmacists have average profit margins of 2%, he said.

Coster said small and independent pharmacists rely more on income from prescriptions than do chain drug stores and could be affected more by the switch, he said. However, the state balanced the reduction in Medicaid drug reimbursement by nearly doubling its drug dispensing fees, Littlejohn said.

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