Advanced Health Services Exam 3

T/F: outpatient US drug expenditures are stable as a percent of national health expenditures

true

Overall health care expenditures increased ____% from 2023 to 2024

7.2%

Name three reasons for disconnect between newspaper stories about high drug prices and actual drug expenditures

1. list price vs. net price and the role of manufacturer rebates/discounts

2. most prescription drugs used are lower-cost generic drugs

3. high patient out of pocket costs for outpatient prescription drugs

Describe the manufacturer rebate process

1. manufacturer and PBM negotiate rebate amount

2. PBM and employer negotiate amount passed through to employer

3. at the end of the quarter, manufacturer pays PBM agreed upon rebate for every prescription used by employees of contracted employer

4. PBM passes the rebate through to employer/health plan

T/F: net prices and manufacturer rebate amounts are typically available to the public

false - typically only list prices

Which payers get more rebates?

payers who are willing to have more restrictive formularies

For which types of medications are rebates typically given

brand name drugs with close substituents

______ requires rebates for generic drugs

Medicaid

Describe two emerging models based on lower list prices for medications as a transition away from the rebate model

1. lower list price for everyone with reduced rebates

2. lower list price for some - direct to consumer cash sales, convoluted workarounds, government intervention

Rationale for movement away from the rebate model

- public pressure to lower drug prices

- government intervention (Inflation Reduction Act of 2022)

- PBM's gaining negative publicity and legislation against

New requirement based on FTC Enforcement Action/Express-Scripts FTC settlement

must provide a standard offering to plan sponsors that ensures members' out-of-pocket expenses are based on the drug's net cost, rather than artificially inflated list price

What did the Inflation Reduction Act of 2022 require?

the federal government to negotiate Medicare drug prices for some high-cost single source brand name drugs

Negotiated "Maximum Fair Prices" are only for people enrolled in _________

Medicare

Implementation timeline of the Prescription Drug Provisions in the Inflation Reduction Act

2025 - $2,000 out of pocket max and implementation of Medicare Prescription Payment Plan (MPPP)

2026 - 10 Part D drugs

2027 - 15 Part D drugs

2028 - 15 Part B and D drugss

2029 - 20 Part B and D drugs

Drug selection criteria for Medicare Drug Price Negotiation

1. among top 50 drugs by gross Medicare spending

2. single source brand name drug or biological product without approved and marketed therapeutic equivalents

3. at least 7 years for brand name or 11 years for biologics past FDA approval date (longer now)

Factors considered when determining negotiated MFP

- manufacturer's R & D costs and extent to which they have recouped those costs

- production costs

- federal support for R & D related to drug

- clinical benefit of the drug and extent to which the drug represents a therapeutic advance compared to alternatives

Potential effects of Medicare negotiation drug prices

- change in patient OOP costs?

- change in manufacturer R&D strategies

- change in Medicare part B and D premiums

- change in pricing and marketing strategies

- spillover effects to list prices and rebates for other payers like private insurers

- effects on pharmacies

Describe how discount cards work

- based on idea that pharmacy usual and customary prices are higher than PBM's pharmacy reimbursement rates

- discount card company contracts with PBMs to give patients access to the PBM reimbursement rates at participating pharmacies

- GoodRx displays the lowest PBM reimbursement amount at each pharmacy

- patient take coupon to their pharmacy where they pay the coupon price, rathe than the pharmacy's usual and customary price

- the pharmacy processes the prescription through the PBM specified on the coupon and charges the patient the listed coupon price

Which patients use discount cards the most?

cash paying patients, but also used by patients with private and public insurance

How do discount cards impact pharmacies?

- instead of getting paid their usual and customary prices for a cash prescription, pharmacies receive the lower PBM reimbursement rate price

- when the pharmacy processes the prescription, they pay a transaction fee that is split between the discount card and PBM

- to be in a PBM's network, pharmacies may be required to accept all discount cards that PBMs participate in

Describe how Mark Cuban CostPlus Drug Company works

- online mail order pharmacy

- contracts to but mostly generic drugs from manufacturers and sell them to consumers on their website using a transparent pricing model

- contract with another company to ship the prescription drugs to the patient

- also started a discount care type program that can be used at local pharmacies

- opened a generic pharmaceutical manufacturing facility to target shortage medications

Original goal of 340B

give organizations that serve low-income patients access to discounted prices for prescription drugs

Describe how 340B works

1. provider at a 340B entity writes a prescription

2. 340B entity or 340B contract pharmacy buys drugs at 340B discounted price and dispenses the 340B prescription

3. the payer is billed for dispensed prescription at regular prices

4. profit is split between the 340B entity and 340B contract pharmacy

T/F: 340B eligibility is based on patient income and/or insurance

false - dependent on provider eligibility

Describe 340B pricing

- drug prices are required to be below the Medicaid ceiling price

- minimum discount of 23.1% of the Average Manufacturer Price (AMP)

- discounts may be as high as 70-100%

- 100% discounts fall under the penny rule and are priced at $0.01

T/F: 340B drugs are not eligible for rebates

true

Major concerns with the 340B program

- 340B entities receive and keep 340B discounts for privately insured and Medicare patients

- 340B entities are not required to pass along discounts to low income or uninsured patients

- 340B entities are not required to spend 340B profits on care for indigent patients

Define assests

resources owned by the pharmacy

Define liabilities

resources owed by the pharmacy

Define Owner's equity or net worth

money remaining after liabilities are subtracted from assests

Define revenue

money earned by the pharmacy for services rendered or products sold (sales)

Define expenses

costs incurred to generate the pharmacy's revenue

Define Cost of Goods Sold (COGS)

money spent for products sold by the pharmacy

Define Operating Expenses

money spent to acquire resources used by the pharmacy

Define net income/profit

money left after expenses are subtracted from revenue

Defien balance sheet

shows the financial condition of the pharmacy at a single point in time

Define income statement

shows a summary of the pharmacy operations for a period of time (also called Revenue and expense statement or profit and loss statement)

Owner's equity equation

assets-liabilities

Current ratio equation

current assets/current liabilities

Quick ratio equation

(Current assets - inventories)/current liabilities

Gross margin percent equation

(sales - COGS)/sales * 100

Net profit percent equation

net profit/net sales * 100

Gross margin/profit equation

sales - COGS

Net profit/income equation

sales - COGS - operating expenses

Name the two biggest pharmacy expenses

costs of goods sold

labor

Three main functions of supply chain management

demand planning

inventory management

procurement

Define demand planning

reliably forecasting what drug products will be sold

Define inventory management

minimizing financial investment while maintaining adequate supply of drug products

Define procurement

purchasing and sourcing of drug products

The drug product supply is regulated by the _______________ Act

Drug Supply Chain Security Act

Flow of the drug product supply chain to patients

API > pharmaceutical manufacturers > drug wholesalers/suppliers > hospitals or pharmacies > patient

What is the goal of DSCSA?

protect consumers from counterfeit, stolen, and contaminated drugs by ensuring that the origin of all products can be tracked throughout the entire drug supply chain

US suppliers provide only ____% of API for US prescriptions

12%

Describe the newly implemented tariffs incentivizing onshoring of the drug supply chain

applies to APIs and finished pharmaceutical products

imposes 100% tariffs on brand name pharmaceutical manufacturers with the following exceptions

- have most favored nation pricing deals

- have previously negotiated trade deals

- agree to build manufacturing or other facilities in the US

- orphan and some specialty drugs may be exempt

Costs associated with insufficient drug product inventory

- lost business

- patient dissatisfaction

- higher procurement costs

Examples of inventory "carrying costs"

- capital costs - money that could be used elsewhere

- storage costs - space to store inventory

- cost of risk

Define inventory turnover ratio

number of times a pharmacy's inventory is replaced over some period of time

Inventory turnover ratio equation

COGS/average inventory

Recommended inventory turnover ratio

15-20

Issues/challenges related to inventory management

- high cost of specialty drugs

- shortages

- third party reimbursement delays

- drug price increases or decreases

- formulary changes

- low margins on third party prescriptions

Big 3 primary drug wholesalers

McKesson

CardinalHealth

Cencora

Examples of secondary drug wholesalers

TopRx

Anda

Apital Drug

Republic pharmaceuticals

KeySource

Tri-Pharma

What are Group Purchasing Organizations (GPOs)?

intermediaries between the pharmacy and drug wholesaler

- may negotiate purchasing terms with wholesalers

Cost of dispensing (COD) includes all costs of filling a prescription except the cost of ________________

the drug product (COGS)

What is the largest component of cost of dispensing?

labor costs

Define direct costs

costs that are completely attributable to one output (ex. prescription vials and labels)

Define indirect costs

costs that are associated with multiple outputs (ex. rent)

Define pharmacy fixed costs

costs that do not change as the pharmacy volume changes (ex. rent)

Define pharmacy variable costs

costs that change directly as the volume of services increases

Define economies of scale

the cost per unit decreases as volume increases

Describe the process for calculating cost of services

1. identify and allocate all costs associated with performing the service

2. sum up all these costs

3. divide the total costs by the appropriate unit of use over a selected time period

4. gives you the average cost per unit

_______ costs are allocated 100%

direct

Three methods for allocating indirect costs

Percent of sales - % of total sales generated by the service of interest

Square footage - % of space used by the service of interest, typically for expenses like rent and utilities

Percent of time - % of time spent on the service of interest and multiply by the salary or multiply staff hours spent by hourly wage

Uses for cost of service information

- analyze cost trends over time

- set prices for services

- determine profitability of services

- evaluate third party reimbursement

- justify services

- aid in cost cutting decisions

- aid in personnel decisions

Key reasons that an imbalance of market power between third party payers and pharmacies has made dispensing prescriptions less profitable

1. PBM market concentration/high market share

2. growing vertical integration

What is the main role of pharmacy services administrative organizations (PSAOs)?

- negotiate and sign contracts between pharmacy and third-party payers

- provide pharmacies with information and tools to help improve their performance on measures used for value-based reimburseemnt

Third-party contracts typically reimburse at the lower of ____________ or ____________

the pharmacy's usual and customary price or the reimbursement formula price

Third parties pay the pharmacy the contractual reimbursement amount minus any ____________________

patient cost sharing

What does it mean for pharmacies to accept assignment?

not charge the patient more than the specified cost-sharing amount

Two components of third-party reimbursement formulas

ingredient cost + dispensing fee

Define actual acquisition cost (ACC)

the pharmacy's cost to purchase the drug product

Define estimated acquisition cost (EAC)

third-party estimate of AAC in which reimbursement is based on

Four methods third-parties use to calculate EAC

Average Wholesale Price (AWP)

Wholesale Acquisition Cost (WAC)

Average Acquisition Cost (AvAC)

Maximum Allowable Cost (MAC)

Define average wholesale price (AWP)

a list price for what drug wholesalers charge pharmacies (not what the pharmacy actually pays)

Typical equation used to estimate EAC based on AWP

EAC = AWP - some percent

(AWP is higher than AAC, so third-parties adjust estimate)

Define wholesale acquisition cost (WAC)

a list price of what drug wholesalers pay to buy drug products from manufacturers

T/F: wholesalers pay manufacturers less than WAC

true

Define average acquisition cost (AvAC)

an average of AACs from multiple pharmacies

How is AvAC typically determined?

determined by surveys asking pharmacies to report their actual acquisition costs (AAC)

Define National Average Drug Acquisition Cost (NADAC)

a measure of AvAC that is published by the federal government

How is NADAC typically determined?

voluntary monthly surveys of random sample of pharmacies in all states to determine AACs (excludes discounts or rebates)

State Medicaid programs generally use ________ to determine pharmacy reimbursement

NADAC

Define Maximum Allowable Cost (MAC)

the highest amount that a third-party will pay for a multi-source drug product

What is the name of the federal maximum allowable cost list?

Federal Upper Limit (FUL)

State Medicaid programs may use the FUL or create their own ______________

state maximum allowable cost list (SMAC)

Ingredient cost spread equation

EAC - AAC

Private third-party plans often have dispensing fees as low as ____ to ____

10-50 cents

Why may 90-day supplies decrease pharmacy reimbursement?

only get 1 dispensing fee instead of 3 if they were to get 30 day supply at a time

Dispensing fees need to be higher for an EAC based on ___________, compared to an EAC based on _______ or _______

higher for AvAC compared to AWP or WAC

What is another name for AAC?

cost of goods sold (COGS)