The Bush Administration is proposing to tie Medicaid rebate calculations to Average Wholesale Price rather than Average Manufacturer's Price.

The Centers for Medicare & Medicaid Services' fiscal 2003 budget proposes "changing the way the Medicaid drug rebate is calculated from the difference between a manufacturer's best price and AMP to the difference between the best price and the AWP," the Administration's Feb. 4 budget proposal states.

Since most published AWPs run at least 15%-20% higher than AMP, the proposal would create an immediate 15%-20% increase in the size of Medicaid rebates.

In the long run, the proposal would also resolve concerns about the "spread" between AWP and actual prices in the context of Medicare payment calculations.

Tying Medicaid rebates to AWP would give manufacturers an incentive to eliminate the spread between the list price and actual prices in the marketplace.

Manufacturers would be required to report both AWP and AMP to CMS.

The Administration believes the change would result in a savings of $290 mil. in fiscal 2003 and $5.5 bil. over five years.

"It's a significant difference in the calculation of rebates," CMS Deputy Administrator and Chief Operating Officer Ruben King-Shaw told a UBS Warburg investors conference Feb. 6 in New York City.

From the Administration's perspective, the proposal offers a nifty two-for-one deal: immediate relief for state Medicaid agencies struggling to rein in pharmacy budgets and a longer term solution to the AWP payment methodology problem under Medicare.

For manufacturers, the proposal carries uncomfortable echoes of the original Medicaid rebate law enacted in 1990 under the first President Bush.

As was the case 12 years ago, industry will be wary of pushing too hard against a Republican Administration that it counts as an important ally.

Manufacturers may have a shared interest with retail pharmacy groups in opposing the proposal. Because pharmacy reimbursement rates under Medicaid are typically tied to AWP, any proposal that encourages reductions in AWP would be a de facto reduction in dispensing fees.

In 1990, pharmacists supported the Medicaid rebate proposal in part because it included a moratorium on reductions in pharmacy reimbursement.

The White House representative in discussions with manufacturers over the original rebate law was Tom Scully, the current head of CMS.

During a Feb. 5 press briefing, Scully stressed the importance of AWP reform under Medicare, but did not discuss Medicaid rebates.

Scully declared that the Administration will act on its own authority to reduce Medicare reimbursement rates if Congress does not pass legislation.

"There's a budget assumption in the baseline that says that if Congress doesn't act to do it this year, the Administration will do it," he stated.

Scully pointed out that in the absence of legislation CMS can only cut payments, not increase reimbursement rates for oncologists and other medical practitioners who administer drugs under Medicare.

"We have the ability to lower AWP," he said. "We do not have the ability administratively to put the money back in there. So it's clearly much better for Congress to do it."

"If you save money on AWP, in the same bill you should probably raise...payments a modest amount" for administering or dispensing the drugs, Scully said.

The declaration by the CMS Administrator that it will cut reimbursement in 2002 offers a clear incentive for practitioners to work with legislators on a consensus bill this year.

"Our hope is before Congress gets rolling, the Administration would come to an agreement" with the relevant committees in the House and Senate, Scully added.

The House Energy & Commerce Committee announced last year that it wanted to move forward with legislation to tie Medicare reimbursement to "average sales price." The ASP formula was developed by the HHS Inspector General in negotiating compliance agreements with Bayer and TAP as part of False Claims Act settlements (¹ Also see "Bayer, TAP “Average Sales Price” To Replace Medicare AWP In House Bill" - Pink Sheet, 19 November, 2001., p. 26).

The House Ways & Means Committee did not sign on to the approach favored by Energy & Commerce.

One procedural advantage for the Administration's approach is that there is no shared jurisdiction on Medicaid; only the Energy & Commerce Committee would be involved in changing the rebate formula.

Scully reported that he has "spent a lot of time talking to" Energy & Commerce/Oversight Subcommittee Chairman Jim Greenwood (R-Penn.).

"Mr. Greenwood has been talking about Average Sales Price, which is a new concept," Scully noted. "We'd like to come to a common understanding with him quickly as to what the right policy is so there's no debate on the policy that would push it apart on the Hill."

Medicare or Medicaid payment changes would also have to go through Sen. Edward Kennedy's (D-Mass.) Health Committee.

During a Feb. 4 American Enterprise Institute briefing, White House health advisor Mark McClellan, MD/PhD, stressed the importance of ensuring that AWP reform does not reduce practitioner payments to unacceptable levels.

"While there are some clear payment problems...these payments are also very important...for providing the reimbursement that healthcare providers need to deliver the drug services in Medicare," McClellan said.

"We're going to try to work closely with Congress and try to find a workable solution, both for the overpayments and for the need to address practice costs associated with it," McClellan said.

CMS Proposes Medicaid Rebate Increase By Tying Formula To AWP, Not AMP

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