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

At one time, public and private payers relied on cost-based reimbursement to compensate health care providers. However, cost-based reimbursement resulted in dramatic increases in health care spending, because providers had no incentive to shop around for the least costly goods or devise the most efficient way to provide services. In response, payers have largely abandoned cost-based reimbursement, and adopted other strategies. One common strategy is to pay the estimated average market price for the goods or services that have been provided.

Pharmaceuticals exemplify this phenomenon. Public and private payers originally paid list price for dispensed pharmaceuticals – but it became clear that the list price for most generic drugs was (and is) substantially higher than the actual acquisition cost incurred by pharmacies. In response, public and private payers developed “Maximum Allowable Cost programs (“MACs”) to determine the reimbursement 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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In the private sector, MACs are governed by participating pharmacy agreements (“PPAs”), between pharmacy benefit managers (“PBMs”) and pharmacies. PPAs specify how pharmacies will be reimbursed, detail the nature of any MACs that might apply, and spell out the process for resolving any disputes.

MACs have several predictable effects:

  • Increase dispensing of generics
  • Ensure pharmacies are not overpaid for dispensing generics
  • Make the generic market more competitive and more efficient

Legislative or regulatory measures that limit, restrict, or interfere with MACs are likely to have several unintended adverse consequences:

  • Restricting the use of MACs is likely to increase costs
  • Requiring specific methods and timeframes for MAC appeals and payment adjustments – including requiring “retroactive” payments – is likely to result in administrative complexity, higher costs, and unpredictability
  • Requiring public disclosure of MACs and MAC methodologies is likely to lead to tacit collusion and higher prices