In recent years, the healthcare industry has experienced a variety of legislative changes aimed at lowering drug costs. One example of this is the removal of the Average Manufacturer Price (AMP) Cap within the American Rescue Plan Act of 2021.
In a recent Truveris webinar, pharmacy contract experts discussed the removal of AMP Cap’s impact on plan sponsor spend and the broader healthcare landscape.
The American Rescue Plan Act, commonly known as the ARP Act, is a $1.9 trillion stimulus package that was signed into law in March 2021. While its primary objective is to provide economic recovery and relief in response to the COVID-19 pandemic, the ARP Act also addresses broader healthcare issues and aims to lower health insurance premiums.
One specific provision of the ARP Act has been generating considerable attention – the removal of the AMP Cap for Medicaid. But what exactly does this provision entail, and why is it creating such a buzz in the healthcare industry?
Understanding the AMP Cap Provision
The Average Manufacturer Price (AMP) represents the average price that wholesalers and other large purchasers pay to manufacturers for prescription drugs sold to retail pharmacies. Previously, AMP had been subject to a cap, limiting the maximum rebate that pharmaceutical manufacturers were required to pay to Medicaid for a given drug to 100% of the drug’s cost. However, as of 2024, this ARP provision eliminates that cap entirely. The government’s primary objectives behind this change are twofold: to reduce net drug prices by maximizing rebates and to serve as a deterrent against sharp increases in drug prices. Moreover, by increasing the amount of rebates that manufacturers pay to the government for Medicaid-covered drugs, the government is expected to save billions in Medicaid spending.
The removal of the AMP cap means that the required rebate could potentially exceed the cost of a given drug. In this scenario, pharmaceutical companies could find themselves in the position of having to pay Medicaid when their drug is used, effectively selling at a loss.
How are Pharmaceutical Manufacturers and Pharmacy Benefit Managers Responding?
In response to the AMP cap removal, pharmaceutical manufacturers and pharmacy benefit managers (PBMs) are adjusting their pricing and business models.
Pharmaceutical manufacturers are looking to protect their rebates and avoid paying Medicaid for their drug’s usage, and so are exploring:
- Re-evaluating Drug List Prices: Some manufacturers have opted to reduce the list prices for specific drugs in order to avoid paying Medicaid for the AMP cap. Given that insulins will be the first drug class impacted by the AMP Cap, this class of drugs will likely be the first to re-assess list prices.
- Reassessing Rebate Structures: Pharmaceutical companies are adjusting their rebate structures to align with the new dynamics created by the AMP cap removal.
- Legal Challenges: Notably, some pharmaceutical companies have resorted to legal action to challenge or navigate the implications of the AMP Cap provision.
PBMs are also expecting impact to their rebates due to the AMP Cap provision, and therefore they are looking into the following strategies to adapt:
- Changing Rebate Accounting: In anticipation of changes in list prices and rebates from pharmaceutical manufacturers, PBMs are adapting and reviewing rebate accounting practices.
- Introducing Rebate Credits: Many PBMs are introducing rebate credits to offset reductions in rebates due to manufacturers’ lower list prices.
Key Considerations for Plan Sponsors
The pharmaceutical industry’s response to the AMP cap removal directly impacts plan sponsors and their pharmacy contracts. Therefore, plan sponsors should consider several key factors when engaging with a PBM to understand pharmacy contract impacts:
- Review Your PBM Contract: Partner with your legal team to review any ‘Reservation of Rights’ (RoR) language in your current PBM contract, which may grant the PBM the ability to adjust terms, including rebates, mid-contract due to unforeseen events in the industry.
- Request Projected Rebates: Consider requesting projected rebates from your PBM to assess whether drug list price changes and rebate changes will directly impact your pharmacy program and
- Explore Additional Formulary Options: Your PBM may suggest additional formulary options to maintain your current level of rebates. If this happens, plan sponsors should consider the impact of a formulary change on your members and pharmacy budgets.
- Understanding Rebate Credits: PBMs may offset a reduction in rebate by taking ‘credit’ for manufacturer’s lower list prices, also known as a ‘rebate credit.’ Plan sponsors should review their contract language around rebate credits and consult with legal counsel and the PBM to understand these implications.
Plan sponsors should understand how the changing healthcare pricing landscape created by the AMP cap provision can impact their pharmacy contracts. Partnering with an independent pharmacy partner like Truveris can help untangle the implications of these pharmacy contract changes and ensure you are in the best position to adapt to these legislative changes. Curious to learn more about how the AMP cap provision may impact you or your clients? Connect with us to learn more.