Why Medicaid is a pharma company’s most demanding government program in terms of potential impact and resources.

For both brand and generic pharma companies, the most demanding of the government programs, in terms of financial impact and required resources, is often Medicaid. There are currently over 75 million Medicaid beneficiaries covered by more than 300 active programs in the United States. Pharmaceutical companies are required to submit monthly and quarterly Average Manufacturer Price (AMP) calculations to CMS as well as separate individual submissions to certain states.

The AMP is derived from a comprehensive set of sales data. Lack of complete datasets and disciplined scrubbing is often where most AMP calcs begin to go wrong. Incorrect or missing Class of Trade (COT) assignments is just one example of a common failure. To many, the computations resemble calculations for rocket fuel formulas!

Once completed, the AMP value is then used to derive a Unit Rebate Amount (URA), which represents the dollar value of rebates which must be paid for utilization reported through the many Medicaid programs across the United States.

For brand manufacturers, barring any inflation penalties or additional AMP implications from commercial contract pricing and their impact on another computation called Best Price (BP), the URA is 23.1% of the AMP value. It is particularly important for brand companies to carefully model the impact on Medicaid rebate liability of contemplated commercial contracts and price adjustments.

Brand companies may also need to explore securing preferred positions on state Medicaid preferred drug lists (PDLs), as it may be necessary to negotiate a supplemental rebate agreement where better PDL positioning is desired. These agreements essentially provide an additional rebate revenue to the state, which can vary in amount, depending upon the formulary position a manufacturer’s product is listed with on the state’s PDL.

Generic companies are not immune from the impact of price adjustments either. URAs start at 13.0% of AMP and can change due to inflation penalties from price increases which are not carefully assessed. With the tight margins under which generic companies operate it is imperative to understand the pricing dynamics at a granular level.

The Medicaid rebate cycle is quarterly. Other than the states requiring separate AMP submissions, Medicaid programs pull URA values from CMS on, or just after, the 31st day following the end of each quarter. The programs then use utilization data, derived from the prescriptions they have paid for covered beneficiaries during the quarter, and send invoices to the listed invoice contacts for each pharmaceutical manufacturer.

CMS requires that a Reconciliation of State Invoice (ROSI) is prepared for the current quarter and a Prior Quarter Adjustment Statement (PQAS) is prepared for any prior quarter adjustment invoices sent by a state Medicaid program. There are technically no limitations for how far back a program can make adjustments. Payments and the reconciliation documentation must be received back to the submitting program within 38 days of the invoice postmark date. Interest accrues for late payments.

Given the complexity of government pricing requirements, changes to rule sets and minimal regulatory guidance, Medicaid is easily the most demanding program to manage. While it is especially important for brand pharmaceutical companies to carefully model all pricing decisions due to Best Price ramifications, both brand and generic pharma companies must carefully analyze the impact of pricing and contracting opportunities on Medicaid rebates and continually update accruals for the resultant rebate liability to ensure they completely understand the impact those decisions may have on profitability.

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