Understanding Baseline AMP Rules Can Help You Avoid Pricing Decision Disasters

What brand and generic drug manufacturers need to know

A lack of understanding respective to baseline Average Manufacturer Price (AMP) and how it can affect your Medicaid pricing can result in incorrect government reporting. Based upon the pricing decisions you make, this can have a dramatic negative impact on your bottom line.

Unlike generic drug manufacturers, branded drug makers participating in the Medicaid Drug Rebate Program have long had to report a baseline AMP following the addition of a drug to their Medicaid Drug Rebate Agreement.

Yet both entities can benefit from a recap of the rules – especially generics that may not be fully aware of their obligations due to more recent changes in the rules governing inflation penalties and the severe consequences for noncompliance.

The baseline AMP for a branded drug is simply the AMP of a drug during the first full quarter after launch. Once the baseline AMP is established, all future quarterly AMP calculations are compared against the baseline AMP and corresponding Consumer Price Index Value (baseline CPI is the CPI for the month before the baseline quarter) to determine if your AMP is increasing faster than the CPI. If it is, you will end up owing a penalty in the form of an additional Medicaid rebate, which can quickly escalate and end up resulting in selling your drug to Medicaid and PHS entities for what amounts to penny pricing.

If you are a brand company and aren’t fully confident that you have a strong understanding of how your baseline AMP may be affecting your bottom line, this paper may provide some supportive guidance.

If you are a generic drug maker and assume you don’t have to worry about it, this information will be an eye-opener. Section 602 of the Bipartisan Budget Act (BBA) of 2015 introduced legislation which requires drug manufacturers of generic products to pay additional rebates on generic/non-innovator drugs if the price (AMP) of their drug increases faster than the rate of inflation, using the CPI as the benchmark for inflation. Therefore, beginning with the 2017 calendar year, all AMPs for Generic/Non-Innovator products have been subject to the inflation penalty calculation.

Brand manufacturers: What’s important to know about baseline AMP?

As mentioned above, the baseline AMP is set using the AMP from the first full quarter of sales of your product. This means that if you are launching a product on March 25, your baseline AMP will be second quarter (April – June). If you are launching on January 2, your baseline AMP will still be second quarter.

Here are a few important factors to consider when you are launching your branded drug or making pricing decisions on an existing product:

  1. The baseline AMP follows the NDA, not the NDC. If you have acquired rights to market an NDA that was subject to a Medicaid Agreement, you are going to need the baseline AMP of the first drug launched under that NDA. You also need to recognize the impact that baseline AMP may have on your targeted launch price. In certain situations, just matching the pricing of the original drug can result in Medicaid rebate liabilities of 80 percent or more of AMP due to previous price increases by the original manufacturer. You don’t want to be in a situation where you are counting on Medicaid rebates of 23.1 percent of AMP and then realize after launch that your Medicaid Liability is 85 percent of AMP. Make sure you know the baseline AMP of the NDA you are going to be marketing and how that will impact your liability given your planned pricing strategy.
  2. Price increases often result in inflation penalties. The average rate of inflation for the last 10 years is just over 2 percent per year. Therefore, even contemplating a somewhat conservative increase of 4 or 5 percent on an annual basis, you are likely paying inflation penalties and you may not know it.
  3. Initial order discounts could have an impact on your Baseline AMP. It’s important to review with your GP Team how what you are doing from a contracting perspective could impact your Medicaid rebate liability, as your initial order discounts could end up resulting in years of Medicaid penalties that you had not considered.
  4. If you are marketing an Authorized Generic, this section applies to you. Authorized Generics are typically treated as Multi-Source Innovator products, meaning that baseline AMP rules your product will follow are the same as brand manufacturers, not generic manufacturers.

Generic manufacturers: Have you unknowingly incurred inflation penalties?

There are important differences between brand and generic inflation penalties:

  1. Generic baseline AMPs follow the ANDA, not the NDC. This means that manufacturers must know the baseline information for any ANDAs they are marketing previously covered under a Medicaid Agreement.
  2. Generic baseline AMPs are set in the fifth full quarter following launch, not the first full quarter.
  3. The baseline CPI is set using the CPI value in the last month of the baseline quarter, not the month before as it is with branded products. This is relevant because there are often small inflation penalties during your baseline quarter since the comparison calculation uses the CPI of the previous quarter for the “Current CPI.”
  4. If a drug was launched before April 1, 2013, the baseline AMP will use the AMP established in Q3 2014.

Other than the few differences listed above, the penalties are similar to what brand manufacturers face. If your AMP rises faster than the rate of inflation, you will pay an additional inflation penalty to Medicaid.

You may assume that if you don’t take WAC price increases, you shouldn’t be impacted. Unfortunately, it’s a dangerous assumption. AMP will fluctuate from quarter to quarter and any contract pricing changes or discounts offered can influence AMP, since AMP is designed to find the average price retailers paid for a drug.

For example, if you initially provided a significant volume to one of the big retail chains, but lost that agreement and now sell through wholesalers and small retail pharmacies, your AMP may go up. Those big retailers were likely receiving lower pricing than the smaller retail pharmacies purchasing your drugs from a wholesaler.

Even though you’ve not taken any actions to increase the list price of your drug, if your product already had its baseline AMP established, you can end up in situations where significant inflation penalties are incurred.

Considering acquiring an existing brand or generic drug? Watch out for the baseline AMP.

When acquiring a drug, make sure to do your due diligence and discovery: Has the product been marketed through Medicaid? What is its Baseline AMP and quarter? How might this impact your pricing strategy and profitability goals?

Not only is it important for your business, baseline AMP is also required by the government. If you have a Medicaid agreement, you need to understand what those baseline values are, as they will need to be reported when you add that product to your agreement.

Here are some questions you should be asking if you are in the process of acquiring a product:

  1. Has this ANDA/NDA been marketed previously?
  2. What price increases has this drug had in the past?
  3. Has this ANDA/NDA ever been marketed through Medicaid?
  4. What is the Baseline AMP and Baseline Quarter for the product?
  5. If you acquire the product, based on your planned pricing strategy, as well as the previously set baseline values, will the AMP you are projecting have Medicaid penalties?
  6. What is the Medicaid and PHS/340B volume that you are anticipating?
  7. Can you still meet your growth and profitability goals if there are significant inflation penalties associated with that drug?

Baseline AMP rules are complicated. But pricing missteps which drive inflation penalties can painful.

Government pricing is complex and inflation penalties are just one of many important considerations you should carefully evaluate as you are marketing your products. If you have questions about your situation and baseline AMP, call us. We regularly provide companies with preliminary guidance – without long-term obligation. Nobody wants to see penalties unnecessarily incurred.

Be certain you are not making marketing/pricing decisions that may have a negative financial impact on your organization. Call us at 262-297-3007 or email your questions to info@prescriptionanalytics.com.

Subscribe to receive our publications.

Share this story, choose your platform.