Express Scripts 2011 Annual Report Download - page 19

Express Scripts 2011 Annual Report 17
not generally apply to us directly, but it may apply to certain of our clients, such as HMOs and health insurers. If such
legislation were to become widely adopted and broad in scope, it could have the effect of limiting the economic benefits
achievable through pharmacy benefit management.
Legislation and Regulation Affecting Drug Prices. Some states have adopted so-called ―most favored nation‖
legislation providing that a pharmacy participating in the state Medicaid program must give the state the best price that the
pharmacy makes available to any third party plan. Such legislation may adversely affect our ability to negotiate discounts in
the future from network pharmacies.
In addition, federal and state agencies and enforcement officials from time to time investigate pharmaceutical
industry pricing practices such as how average wholesale price (―AWP‖) is calculated and how pharmaceutical
manufacturers report their ―best price‖ on a drug under the federal Medicaid rebate program. AWP is a standard pricing
benchmark (published by a third party) used throughout the industry, including by us, as a basis for calculating drug prices
under contracts with health plans and pharmacies. First DataBank and Medi-Span were defendants in a class action suit in
federal court in Boston alleging a conspiracy in the setting of AWP. The parties entered into a settlement agreement which
received final approval by the court, and a roll-back of AWP prices for many drugs went into effect on September 26, 2009.
First DataBank discontinued publishing AWP information in 2011, at which time we transitioned to use of Medi-Span
information. This change did not materially impact our financial position, results of operations, or cash flows. Additional
changes to or discontinuation of the AWP standard could alter the calculation of drug prices for federal programs and other
contracts that use the standard. We are unable to predict whether any such changes will actually occur, and if so, whether
such changes would have a material adverse impact on our consolidated results of operations, consolidated financial
position and/or consolidated cash flow from operations.
Further, the federal Medicaid rebate program requires participating drug manufacturers to provide rebates on all
drugs reimbursed through state Medicaid programs, including through Medicaid managed care organizations.
Manufacturers of brand name products must provide a rebate equivalent to the greater of (a) 23.1% of the ―average
manufacturer price‖ (―AMP‖) paid by retail community pharmacies or by wholesalers for products distributed to retail
community pharmacies, or (b) the difference between AMP and the ―best price‖ available to essentially any customer other
than the Medicaid program and certain other government programs, with certain exceptions. We negotiate rebates with drug
manufacturers and, in certain circumstances, sell services to drug manufacturers. Investigations have been commenced by
certain governmental entities which call into question whether a drug’s ―best price‖ was properly calculated and reported
with respect to rebates paid by the manufacturers to the Medicaid programs. We are not responsible for such calculations,
reports or payments. There can be no assurance, however, that our ability to negotiate rebates with, or sell services to, drug
manufacturers will not be materially adversely affected by such investigations or regulations in the future.
Regulation of Financial Risk Plans. Fee-for-service prescription drug plans generally are not subject to financial
regulation by the states. However, if a PBM offers to provide prescription drug coverage on a capitated basis or otherwise
accepts material financial risk in providing the benefit, laws in various states may regulate the PBM. Such laws may require
that the party at risk establish reserves or otherwise demonstrate financial responsibility. Laws that may apply in such cases,
including as applicable to our Medicare Part D subsidiary, ESIC, include insurance laws, HMO laws or limited prepaid
health service plan laws.
Pharmacy Regulation. Our home delivery and specialty pharmacies are licensed to do business as a pharmacy in
the state in which they are located. Most of the states into which we deliver pharmaceuticals have laws that require out-of-
state home delivery pharmacies to register with, or be licensed by, the board of pharmacy or similar regulatory body in the
state. These states generally permit the pharmacy to follow the laws of the state in which the home delivery service is
located, although some states require that we also comply with certain laws in that state. We believe we have registered
each of our pharmacies in every state in which such registration is required and that we comply in all material respects with
all required laws and regulations. In addition, our pharmacists and nurses are licensed in those states where we believe their
activity requires it. Our various pharmacy facilities also maintain certain Medicare and state Medicaid provider numbers as
pharmacies providing services under these programs. Participation in these programs requires our pharmacies to comply
with the applicable Medicare and Medicaid provider rules and regulations, and exposes the pharmacies to various changes
the federal and state governments may impose regarding reimbursement amounts to be paid to participating providers under
these programs. In addition, several of our pharmacy facilities are participating providers under Medicare Part D, and as a
condition to becoming a participating provider under Medicare Part D, the pharmacies are required to adhere to certain
requirements applicable to the Part D Medicare program.