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MEDICAID Rx REIMBURSEMENT CHANGES IN KENTUCKY COULD COST BEGLY CHAIN ABOUT $3 MIL. IN ANNUAL GROSS PROFITS, ACCORDING TO AFFIDAVIT IN SUIT VS. HFCA

Executive Summary

The proposed Medicaid Rx reimbursement changes in Kentucky could cost the Begley chain "a loss in gross profits of 8%-10%," Begley Exec VP-Treasurer Donald Snyder declared in an affidavit filed in support of the pharmacy coalition v. HCFA. Based on Begley's most recent fiscal year figures, Snyder indicated a potential loss to the chain of between $2.8 mil. and $3.5 mil. in gross profits over a twelve-month period. Snyder told the court that the 12.9% cut in the average wholesale price proposed for Kentucky reimbursement would make it unlikely that the chain could continue to break even on Medicaid service which saddles the chain with special administrative costs. Pointing out the extra administrative costs of Medicaid Rxs, the Begley exec reported that the chain maintains three employees "each working 40-hour weeks, who are dedicated entirely to processing, and often reprocessing, Medicaid claims." In addition, Snyder said Begley hires an outside service bureau to deal directly with the state. In the past, Begley has been able to justify the extra costs because of the margin allowed by buying efficiencies. The effect of the Medicaid changes on profits for independent retailers could be more drastic, according to an affidavit by Idavel, Oklahoma independent Tom Hobza. Using the example of a standard Tagamet Rx, Hobza indicated that buying discounts for independents could be cut by as much as 19% by the changes in the Medicaid formula. Hobza explained that he can generally get a 13% discount off the average wholesale price of Tagamet for prompt payment of an order. Based on a Tagamet AWP of $37.50, Hobza can get a discount of $4.87. Oklahoma Medicaid changes would reduce his reimbursement by the state from the AWP level to $33.57, cutting his margin on purchase of the product to 94 cents. The new Medicaid formula plus the Oklahoma dispensing fee ($3.55) would leave Hobza with a gross profit on Medicaid Tagamet Rxs of $4.49, compared to $8.42 by the current AWP method. Hobza pointed out that his real profit on Rxs is further reduced by a rental agreement which calls for 8% of profit to be paid for the lease. He calculated that, including the rent agreement, his profit on Medicaid Tagamet Rxs would be $2.97 before allocations for salaries and administrative costs. "I understand that the government is concerned with cost containment," Hobza stated. "But it cannot simply continue to cut at the expense of the pharmacist. If the government keeps pushing and pushing, I will be in a position where I will make more money by not filling Medicaid Rxs than I would by filling them." Hobza added: "At the very least, I may have to stop providing the higher cost Rxs." * The 22-state Medi-Save chain told the court that it will "continue to serve Medicaid patients," but "the lower levels of reimbursement will cause us to reassess the viability of individual drug stores." Medi-Save President Edward Hiller stated in a Sept. 11 affidavit that "those drug stores that are operating at a loss and are heavily dependent on Medicaid sales may have to close down, or stop participating in the Medicaid system." He further questioned his chain's overall participation in Medicaid, declaring "we will have to . . . consider whether to shift our emphasis to rely less on Medicaid sales and, instead, increase Rx drug service to private patients and patients with other medical plans." The institutional/nursing home segment of Medi-Save is particularly vulnerable to the Medicaid changes, Hiller observed. Eighteen of the 102 Medi-Save units, Hiller pointed out, are devoted primarily to the institutional/nursing home business. "Approximately 50% of the Rx drugs sold through our institutional division go to Medicaid recipients," Hiller said. K&B chain president, Sidney Besthoff III, maintained in a Sept. 11 affidavit that the reimbursement changes in his chain's region (Alabama, Louisiana and Texas) would put an end to the de facto system his chain uses to subsidize the slow payment system of the Medicaid program. "In the past," Besthoff said, "we have been able to compensate for some of ]the extra administrative[ costs by efficient purchasing." The HCFA changes, however, "mean that we will receive lower payments from Medicaid than we receive now and our ability to defray these cost will be impaired. Moreover, we have no way to avoid these losses," Besthoff contended. "Ultimately," Besthoff cautioned, "these losses may end up reflected on the quality of service provided to Medicaid recipients." Besthoff said that his chain "will try to remain in the Medicaid system as long as possible." Besthoff reiterated the warning that K&B could be forced to "reassess whether we can afford to continue participating in the Medicaid system in light of the harsh economic realities." He declared: "K&B cannot afford to subsidize the government indefinitely."

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