BILL ANALYSIS �
Senate Appropriations Committee Fiscal Summary
Senator Christine Kehoe, Chair
AB 399 (B. Lowenthal) - Medi-Cal: pharmacy providers: drug
reimbursement.
Amended: June 26, 2012 Policy Vote: Health 8-0
Urgency: No Mandate: No
Hearing Date: August 6, 2012
Consultant: Brendan McCarthy
SUSPENSE FILE. AS PROPOSED TO BE AMENDED.
Bill Summary: AB 399 would make a variety of changes to the
policies and procedures used by the Department of Health Care
Services when determining the reimbursement rates to be paid to
pharmacies for drugs purchased through fee-for-service Medi-Cal.
Fiscal Impact: Implementation of the changes in the bill is
likely to result in substantial cost increases to the Medi-Cal
program, most likely in the tens of millions per year (50%
General Fund, 50% federal funds).
Specific fiscal impacts of the bill include:
The requirement that the Department use an updated
dispensing fee, based on survey results, would increase
costs to Medi-Cal, potentially up to $130 million per year.
Under current law and policy, the Department pays a
dispensing fee to pharmacies of $7.25 per dispensed
prescription. About 30 million pharmacy reimbursement claims
are paid each year. A 2006 survey of pharmacies indicated
that the average dispensing cost was about $11 per
prescription. Adjusting for inflation, an increase in
dispensing fees from the current level would increase costs
up to $130 million per year. As part of the implementation
of the Average Acquisition Price system (see below for more
detail), dispensing fees may ultimately be raised. However,
this bill requires such an increase, reducing potential
savings from the system.
Eliminating the statutory requirement that the Department
achieve budget savings equivalent to a 10 percent rate
reduction could result in costs in the tens of millions per
year. The Department is in the process of developing a new
AB 399 (B. Lowenthal)
Page 1
methodology for setting reimbursement rates. Under current
law, the Department is required to implement the new
methodology and if the new methodology does not result in
savings equivalent to a 10 percent rate reduction, to
further reduce rates to achieve those savings. The initial
projected savings amount from a 10 percent rate reduction
was $280 million per year. However, due to concerns that
such a reduction would reduce patient access to medication,
prohibited under federal law, a new methodology was
developed that allows for limited rate reductions when there
is a risk of reduced access. The revised savings estimate is
$165 million per year.
The bill makes a number of changes to the new methodology
for determining appropriate reimbursement rates. The
aggregate impact of those changes is likely to be an
increase in reimbursement rates to Medi-Cal. The impact of
those changes is unknown at this time. For example, the bill
changes the current law requirement that Medi-Cal pay the
lower of either the estimated acquisition price (plus a
dispensing fee) or the "usual and customary charge" which is
lowest price paid by any other third-party payer (e.g.
payments negotiated by health plans). Under the bill, "usual
and customary price" would be defined as the lowest price
routinely offered to the general public. Prices offered to
the public are generally higher than prices negotiated by
third party payers. Therefore, the state would not benefit
from paying the same low rates that health plans and other
third-party payers negotiate.
Background: Under current law, the Department of Health Care
Services reimburses pharmacies that fill prescriptions in
Medi-Cal fee-for-service based on a two part payment. The
Department pays the pharmacy for the drugs dispensed based on a
survey methodology that attempts to capture the wholesale price
of the drugs to the pharmacy and the Department also pays a
fixed dispensing fee of $7.25 per prescription. There is
consensus that the $7.25 dispensing fee is less than the average
cost to pharmacies to dispense prescriptions. However, the flaws
in the prior system for determining wholesale drug costs most
likely overstate the costs for drugs paid by pharmacies. Thus,
to some extent, these two errors offset one another.
Through the budget process in 2011, two significant changes were
AB 399 (B. Lowenthal)
Page 2
made to the process for paying for prescriptions in
fee-for-service Medi-Cal. First, the Department was directed to
reduce reimbursement rates to achieve a 10 percent budget
savings.
Second, the Department was required to implement a new process
for determining the reimbursement rates for prescription drugs.
The new system, Average Acquisition Cost, is intended to better
reflect the actual costs paid by pharmacies for drugs than the
prior system (Average Wholesale Price) which is considered to
overstate drug prices that are actually paid by pharmacies. The
Department was directed to implement the Average Acquisition
Price methodology to achieve cost savings. If resulting savings
are less than the 10 percent rate reduction would have
generated, the Department is then required to further reduce
reimbursement rates to achieve total savings equivalent to a 10
percent rate reduction.
The initial savings estimate was $280 million per year. However,
a full 10 percent rate reduction may inhibit access to care for
some Medi-Cal beneficiaries, which is not allowed under federal
law. The Department has revised the rate reduction proposal, to
allow lesser savings if access is impeded. The revised savings
estimate is now $165 million per year.
Proposed Law: AB 399 would make a variety of changes to the
policies and procedures used by the Department of Health Care
Services when determining the reimbursement rates to be paid to
pharmacies for drugs purchased through fee-for-service Medi-Cal.
Specific changes in the bill include:
A requirement that the Department adjust the dispensing fee
before adopting the Average Acquisition Cost methodology.
Such a change to the dispensing fee must be codified in law
before implementation.
The repeal of a requirement in law that any change to the
dispensing fee not result in a loss of the aggregate savings
from changing to the Average Acquisition Price methodology.
The repeal of a requirement in law that the Department
achieve total savings equivalent to the 10 percent savings
target, if the Average Acquisition Price does not generate
such savings.
A variety of changes to the methodology for determining the
Average Acquisition Price. For example, the bill changes the
definition of "usual and customary charges" to exclude the
AB 399 (B. Lowenthal)
Page 3
prices negotiated by other third-party payers. The bill
limits the Department's ability to get information from drug
manufacturers and wholesalers to verify prices reported by
pharmacies. The bill requires the Department to update the
Average Acquisition Price within one week of receiving
reasonable information that the Average Acquisition Price
does not reflect current market prices. On the other hand,
the bill deletes the Department's current law authority to
implement and interpret the Average Acquisition Price
without taking regulatory action.
Related Legislation:
AB 97 (Committee on Budget, Chapter 3, Statutes of 2011) a
2011-12 health budget trailer requires the Department to
reduce pharmacy provider rates by 10 percent.
AB 102 (Committee on Budget, Chapter 29, Statutes of 2011)
a 2011-12 health budget trailer bill requires the Department
to shift to the Average Acquisition Price methodology for
determining pharmacy reimbursement rates.
Author's amendments: Would eliminate the requirement on the
Department to implement a new dispensing fee and make other
clarifying changes.