David A. Hyman
H. Ross & Helen Workman Chair in Law
Professor of Medicine
University of Illinois

Public and private payers routinely rely on “Maximum Allowable Cost” programs (“MACs”) to determine the reimbursement level for dispensed generic pharmaceuticals. MACs are set at a level reflecting the average acquisition cost of a well-run pharmacy. MACs encourage pharmacies to purchase generics at the lowest possible cost, thereby intensifying competition among wholesalers and drug manufacturers, and lowering overall pharmaceutical spending.

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Various states have enacted or are considering legislation limiting the circumstances under which MACs may be used. Arkansas recently enacted legislation that contains a novel provision, which requires pharmacy benefit managers (“PBMs”) to pay pharmacies at least their invoiced acquisition cost – irrespective of whether a lower priced option was available in the marketplace. Other states are considering similar legislation.

This provision will effectively function as a “guaranteed profits” term: no matter how much a pharmacy spends to acquire a drug, they are guaranteed they will be repaid at least that amount, and likely more. And, because of rebates and discounts, invoiced prices may not reflect actual drug acquisition costs – further inflating the guaranteed profits.

The inflationary consequences of similar cost-based reimbursement systems are well known. For many years, the federal government relied heavily on cost-based procurement for defense contracts, only to discover that this approach resulted in large cost over-runs, because defense contractors knew their costs would be reimbursed, however much they were.

In the pharmaceutical setting, such legislation is likely to have a number of specific undesirable consequences, including:

  • Increased spending on pharmaceuticals and the cost of pharmaceutical coverage;
  • Reduced competition at the wholesaler and manufacturer level;
  • Increased use of off-invoice discounting, thereby decreasing transparency of pharmaceutical pricing and reducing pricing competition;
  • Guaranteed profits for pharmacies, irrespective of their actual efficiency;
  • Reduced consumer welfare.

Apart from heavily regulated natural monopolies and government mandated agricultural cartels, we generally do not observe government-mandated guaranteed profits at the expense of third parties. And, natural monopolies and government mandated agricultural cartels are heavily regulated – so they do not get to unilaterally determine their cost structure, and the level of guaranteed profits they will receive. Arkansas’ legislation, and similar legislation being considered in other states, is designed to benefit pharmacies, at the expense of consumers, employers, and PBMs.