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MEDI-CAL "BROKERAGE" DIRECT VOLUME PURCHASE PLAN

Executive Summary

MEDI-CAL "BROKERAGE" DIRECT VOLUME PURCHASE PLAN has the support of the California Pharmacists Association among the several emerging state drug discount programs. The state's Department of Health Services disclosed the outlines of four alternative approaches to drug discounts on April 24. The disclosures coincided with a hearing in the state assembly on pending drug purchase legislation. The Department of Health Services proposals are a distinct project separate from the legislative initiatives. California calls the "brokerage" approach a "negotiated drug buying option." As described by the CPhA and the Department of Health Services, the "brokerage" model would call for the California government to enter into two sets of contracts: (1) between the state and manufacturers (for the product at a discounted price); and (2) between the state and California wholesalers (for the wholesalers to purchase the product from the state). Under the brokerage plan, the state would use the volume and non-profit status of the Medi-Cal program to solicit discounts from the manufacturers. A portion of those discounts would be passed on to wholesalers as an incentive to move drugs for the Medi-Cal program. The state would also retain a portion of the discount as its savings for being the broker. [EDITORS' NOTE: See box on next page for Tagamet cost example.] As the broker, the state government would not take physical possession of the products. "When the Department sells a specified quantity of drug products to a wholesaler," California explains, "the Department places the order with the manufacturer to ship to the specified wholesaler 'x' quantity within agreed upon timeframes." CPhA observes that the state only has to take legal title to the products, not physical possession. California recognizes that the two sets of contracts create a logistic hurdle to the plan. The state points out in an analysis of anticipated opposition to the plan that it would "result in changing wholesalers' business practices in that they will now buy large quantities of drug products from two sources, the manufacturer and the Department." Other wholesaler costs would entail administrative costs to "change inventory/reorder mechanisms and systems for tracking Medi-Cal activity." The state acknowledged that it would have to offer "some inducement" to get wholesalers to participate in the plan. The "brokerage" plan is clearly attractive to pharmacy, which could continue to purchase from any participating wholesaler. Pharmacy reimbursement by the state would continue to include any dispensing fees and any margins between the actual cost from the wholesaler and the calculated reimbursement target price. The lever to get manufacturers to participate in the plan would be legislative changes to tie formulary coverage to participation in the bid program. Legislation with that restrictive goal has not been favorably received in the California statehouse in the past. One bill to toughen the formulary failed to get out of the appropriate California Assembly committee during the week of April 23-27. The Pharmaceutical Manufacturers Association has reserved comment on the specific Department proposals, including the brokerage program. However, PMA Exec VP Robert Allnutt told a hearing before the Assembly Committee on Health on April 24 that the association remains opposed to programs with two of the features of the brokerage arrangement. Allnut said that a program should not "predicate drug coverage" on whether or not the manufacturer of a product is able to provide a rebate or discount. PMA also believes a discount program "must represent a real structural change regarding the state's role in the drug distribution system." PMA objects to efforts to redefine the state as the purchaser without enhancing the state's role in other ways. "Any scheme," Allnut said, "that merely and technically redefines the state as the purchaser, but requires manufacturers to service the existing distribution system, will not be likely to generate the economies necessary to generate price savings for the state." The other state options include a stock replacement plan; a state chargeback option; and a wholesaler chargeback option. The stock replacement plan would also require contracts with both manufacturers and wholesalers. The state would determine inventory needs through monitoring of Medi-Cal claims, purchase the products and call for manufacturers to supply identified wholesalers with stock on a preset schedule. Wholesalers would be paid for receiving, storing and distributing replacement stock. Pharmacies would not have to pay the wholesalers for the stock and would receive reimbursement solely for dispensing fees. TAGAMET COST EXAMPLE FROM MEDI-CAL NEGOTIATED DRUG BUYING ALTERNATIVE This excerpt is taken from a California document dated April 24 explaining the four options for discount drug buying under review administratively by the California Department of Health Services. This example explains how one of the alternatives would work for one drug using hypothetical prices. "Let's assume a bottle of 100 Tagamet 300 mg tablets would normally be reimbursed by the Medi-Cal program at $44.00 for the ingredient cost. Under this proposal, assume that by using our ability to purchase drug products as a large volume buyer, we are able to obtain this drug at a unit price of $28.00. Under this proposal, we would then sell this bottle to the wholesaler for $36.00, and then reimburse the pharmacy $44.00 for their ingredient cost. The Department's total ingredient cost is $28.00 + $44.00 = $72.00. The Department's net ingredient cost would be $72.00 -$36.00 = $36.00. Therefore, the Department's resultant reduction in ingredient cost would be $44.00 - $36.00 = $8.00 for 100 Tagamet 300 mg tablets."
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