The Centers for Medicare & Medicaid Services needs to issue guidance on whether "fee-for-service" payments to wholesalers should be included in average sales price calculations, Mintz Levin attorney Carolyn McElroy told an IIR conference Sept. 21 in Denver.

"I do think CMS has to weigh in on this, because this is an untenable situation for somebody who has got to certify that this is accurate," McElroy said.

Manufacturers are required to report average sales price to CMS for products covered under Medicare Part B, and ASP will be the basis for reimbursement of those products starting in 2005 (¹ Also see "Average Sales Price Final Rule Includes PhRMA’s Estimation Method" - Pink Sheet, 20 September, 2004., p. 14).

The definition of ASP includes the prompt pay discount given to wholesalers by manufacturers (typically 2% of the purchase price), McElroy noted.

However, there is no explicit guidance on whether a distribution fee charged by a wholesaler would count as a discount that needs to be included in ASP calculations, McElroy said.

The "big three" wholesalers have started imposing a fee for service model on some of the smaller brand and generic manufacturers. McKesson and Cardinal have set a March 31 deadline for larger manufacturers to agree to the new model or be cut off from their distribution channels (² Also see "Cardinal, McKesson Issue Ultimatum: March 31 Deadline For Manufacturers" - Pink Sheet, 13 September, 2004., p. 24).

McElroy discussed the fee-for-service contract model as a potential compliance issue for manufacturers.

However, CMS' decision on whether distribution fees should be included in ASP may in effect prevent wholesalers from adopting the fee-for-service model altogether.

According to McElroy, the standard fee charged by wholesalers in contracts with small manufacturers is 5%.

If CMS treats the distribution fee as a discount, that would mean that a manufacturer's ASP would by definition be 7% below the wholesale list price (counting the 5% distribution fee and the 2% prompt pay discount).

As a result, very few physicians would be able to break even on drug purchases under the ASP plus 6% reimbursement formula.

"If you really do have a 2% cash discount and you really do have a 5% fee that is going to McKesson or Amerisource, you are underpriced in the market under ASP," McElroy said.

"Somebody has to sit down and look at this and provide guidance," she said.

The potential penalties for violating ASP reporting requirements make "the question of certification and the lack of clarity even more difficult for manufacturers," Pharmaceutical Research & Manufacturers of America Assistant General Counsel Marjorie Powell observed.

Industry's concern is that "standard operating procedures will become fraud five or 10 years from now," Powell said.

McElroy suggested that the HHS Inspector General's logic for including the prompt-pay discount in the ASP formula likely means that distribution fees will have to be included as well.

"OIG believes that if you have any relationship... between someone who is selling the drug and someone who is buying the drug, and you do not pay what has to be in the reported ASP, there will be the possibility for manipulation," he said.

Hypothetically, a wholesaler could conclude that "it really cost them 4% to distribute a drug," and then negotiate an additional 3% discount. "But if they thought it was to their benefit and it would increase reimbursement to the provider down the road," they could simply record all 7% as distribution costs, McElroy noted.

"There is a sense of feelings both by the manufacturers and the wholesalers that this is intended to cover the cost of the major wholesalers for distributing products in small amounts from small manufacturers," McElroy said. "But in fact, when it comes off the invoice at the end of the month, there is nothing to distinguish" it from any other rebate or discount.

Wholesaler/Manufacturer Agreements May Be Jeopardized By ASP Rules

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