LIBOR and Pharmacy Reimbursement

The LIBOR scandal has died down in the news cycle, but, before the world forgets about the esoteric rate, I'll tie it into some pharmacy commentary.

The London Interbank Offer Rate is an interest rate that an enormous quantity of  loans and financial products around the world use as a proxy for extremely good credit.  The rate is determined by a survey of major, global banks, asking them what they think they would have to pay in order to borrow money for different periods of time.  These results, with the top and bottom quartiles thrown out, are then averaged, and that is the LIBOR for each time period.  LIBOR was in the news because, it turns out, people at some of the banks involved in setting LIBOR attempted to influence the rate by providing fudged estimates.  How does influencing the rate help them?  It produces gains or minimizes losses on investments that are affected by or otherwise tied to LIBOR. So, we have a rate susceptible to manipulation by the people involved in setting it, and these people had a profit motive to do so.  LIBOR is supposed to be a benchmark rate for very secure credit, but it seems, since there was no way to check on whether or not banks were actually lending at that rate, it wasn't a very useful benchmark.

Now to switch gears:  Pharmacies are reimbursed by payers, government or commercial, for the product and service provided.  How do the payers determine appropriate reimbursement?  They pick a benchmark, such as AWP (Average Wholesale Price) and stipulate that pharmacies will be reimbursed at "AWP -15%" or some such.  Where does AWP come from?  Vendors such as Medi-Span and Elselvier publish it in drug price compendia; the numbers come from the manufacturers, who provide either the suggested wholesale price or the wholesale list price (which can differ, similar to how other products are rarely sold at MSRP).

This article does a good job explaining the pros and cons of different pricing benchmarks (http://www.amcp.org/data/jmcp/492-501.pdf), but the main problem with AWP as a payment benchmark from a payer or pharmacy perspective is it often does not reflect what a pharmacy actually paid for a drug product, due to inflated price reporting, rebates, and other forms of discounts.  In addition, the same drug can have many different AWPs as there may be multiple manufacturers, and thus multiple NDCs, each with a unique AWP.  There are numerous other payment benchmarks being used by private and government payers, such as AMP and MAC, but the point is payers use these since they don't know what pharmacies actually pay for drugs.  It's a reimbursement guessing game.

The government in particular wants a more accurate reimbursement benchmark due to the large amount of Medicaid and Medicare drug spending.  AAC, or Actual Acquisition Cost (what the pharmacy actually paid for the drug product), is the goal.  Alabama's state Medicaid agency was the first to collect pharmacy acquisition cost data and use that as the basis for reimbursement (Alabama AAC List).  Note that, being Medicaid, they may be able to compel pharmacies who accept Medicaid to submit the required cost data.  CMS has decided to attempt this on a national scale (Medicaid Survey of Retail Prices) in order to "provide State Medicaid agencies with an array of covered outpatient drug prices concerning acquisition costs and consumer purchase prices.  The State agencies can use this information to compare their own pricing methodologies and payments to those derived from these surveys."  One can assume that Medicare Part D payers and really all commercial providers would enjoy this information as well.  However, CMS may not quite have the same footing as state Medicaid agencies (conjecture on my part), so the surveys used to determine the actual acquisition cost (which CMS is calling NADAC or National Average Drug Acquisition Cost) will be entirely voluntary.  The draft methodology for NADAC is here.

A good Drug Channels post addresses how pharmacies certainly have little incentive to participate as well as a structural problem in the survey: no information about rebates.  Why do rebates matter?  Well, if I sell you something at $100 invoice price but then give you back $50 in rebates at the end of the quarter, the invoice price is $100, but your acquisition cost is $50 + time value of money and other quibbles.  The NADAC survey will thus really be a collection of information about invoice prices.

So, you have voluntary reporting of a benchmark that will be used to determine payments, and there isn't any way to see if the benchmark truly reflects what it is supposed to represent.  See the connection with LIBOR?  In addition, the NADAC survey will be susceptible to gamesmanship such as inflating the acquisition costs on certain or all drugs, not responding, and/or negotiating with your wholesaler to increase invoice prices as well as rebates.  Now I don't know what pharmacies will actually do nor whether or not the NADAC will be a success or failure.  But, based on the experience with LIBOR, there sure are a lot of holes in CMS's plan.