Review of Community Pharmacy Payments for 2014/15

Transcription

1 Review of Community Pharmacy Payments for 2014/15 Corporate Finance May 2016

2 Contents Glossary of Terms 2 1. Executive Summary 4 2. Introduction 6 3. CPSA Stage Stage 4 - Specific Components 9 5. Overall Conclusions 19 Appendix 1: July FY15 payment 20 About Deloitte 28

3 Glossary of Terms Abbreviation Annual Adjustment / Wash-Up Annual Funding Envelope/ FY15 Envelope Brandswitch Case Mix Quarterly Adjustments Definition The annual adjustment calculation made at the end of the year to determine the National Total payment in order to ensure the Annual Funding Envelope is paid out. The national funding envelope for Pharmacy. The FY15 Annual Funding Envelope for Pharmacy is $376,899,969. Payments for switching pharmaceutical brands. Adjustments paid quarterly after recalculating Case Mix Service Fees for negative A3 and J3 transactions. Case Mix Service Fees TAS CPAMS CPSA / Agreement DHBs Final Actual Case Mix Service Fees Forecast Monthly Transition Pool Service fees based on initial and repeat items for LTC and core pharmacies services patients. Technical Advisory Services Limited formerly known as Central Region s Technical Advisory Services Limited Community Pharmacy Anti-Coagulation Management Services. Community Pharmacy Services Agreement District Health Boards Actual Case Mix Fees for August 2014 to June 2015 based on data received up to and including 31 December The pool for forecast monthly transition payments across all pharmacies. FY14 The period 1 July 2013 to 30 June 2014 FY15 The period 1 July 2014 to 30 June 2015 ICP IPPD Interim Actual Case Mix Fee Late Claims Interim Core Payment for each initial item dispensed to a patient who received Core pharmacy services (under Stage 3). Initial items dispensed by that Pharmacy to that patient on that day. Interim Actual Case Mix Fee calculated during FY15 based on the actual number of initial and repeat items the Pharmacy dispensed to service users during the relevant service month. Any claims where payments have occurred after the calculation of the Interim Actual Case Mix Fee. Review of Community Pharmacy Payments for 2014/15 2

4 Abbreviation LTC LTC MSF MOH Monthly Adjustment Payment Monthly Funding Envelope National Total Negative A3 or J3 Transaction Pharmacy Stage 3 / Stage 4 Total PMR RVU TP Definition Long-Term Conditions service LTC Monthly Service Fees (paid in relation to patients registered with a pharmacy in long-term conditions service). Ministry of Health Monthly Adjustment Payment based on actual claims data three months after the date of dispensing. The Annual Funding Envelope is divided into monthly amounts. The value of the Monthly Funding Envelope is based on seasonally adjusted percentages such that each month has a different funding allocation. Total PMR less both July FY15 adjustment and previous PMR payments relating to FY15. To be distributed to ensure annual funding envelope is paid out. Initial and repeat items which have a co-payment amount higher than the standard co-payment amount and the initial item has a value of less than this co-payment using an assumed service fee Community Pharmacy Stage 3 and Stage 4 of the CPSA Stage 3 operated between 1 August 2013 and 31 July Stage 4 operated between 1 August 2014 and 30 June Total Payment Management Reserve. Any unallocated funding at the end of the financial year forms the Total PMR which is then paid out to pharmacies based on each pharmacy s market share of Core and LTC Pharmacy services initials and repeats (inclusive of LTC MSF and all case mix, handling fees, exclusive of negative A3 and J3) less audit recoveries. Relative Value Units are a base fee multiplier, there is a series for initials and one for repeats. Transition Payment for providing core and LTC pharmacy services under Stage 3. Review of Community Pharmacy Payments for 2014/15 3

5 1. Executive Summary Deloitte was asked to undertake a review of payments calculated by Technical Advisory Services Limited ( TAS ) under the Community Pharmacy Services Agreement ( CPSA ) for the period 1 July 2014 to 30 June 2015 ( FY15 ). This Report provides an overview of CPSA payment mechanism, the calculation of payments under the Agreement and conclusions of our review. Stage 4 of the CPSA was implemented in August As FY15 spans from July 2014 to June 2015, the July payment is calculated under Stage 3 of the CPSA and August to June payments are calculated under Stage 4. The calculation processes for both stages have been reviewed separately. The main change in Stage 4 is the introduction of Case Mix Service Fees. The Case Mix Service Fees cover both Core and Long-Term Conditions ( LTC ) Pharmacy services. This reduces the previously calculated transition pool and interim core payments ( ICP ) to zero. Stage 4 also includes a Payment Management Reserve (PMR) to manage the payment of the full funding envelope to pharmacies, once all claims have been received. The PMR is 1% of the funding envelope in Stage 4. The Final Actual Case Mix Service Fees are calculated and paid by the Ministry of Health ( MOH ) Sector Operations team, resulting in the Wash-Up payment process undertaken by TAS being simplified. The output of the process undertaken by TAS is the Total Payment Management Reserve ( Total PMR ) available to be released to pharmacies. Amount available for release (Total PMR) $ excl of GST FY15 Community Pharmacy Envelope 376,899,969 Less: July FY15 Phased Amount (33,546,698) Less: Actual Payments Aug June 2015 (331,357,412) Plus: Audit Recoveries FY15 132,761 Total PMR 12,128,620 The market share of the Total PMR for each Pharmacy is based on the market share of Core and LTC Pharmacy services initials and repeats (inclusive of LTC Monthly Service Fee ( LTC MSF ) and all case mix, handling fees, exclusive of negative A3 and J3) less audit recoveries. July FY15 adjustments (relating to CPSA Stage 3 ( Stage 3 )) and the Interim PMR payments made that applies to FY15 for each Pharmacy are subtracted from the Total PMR for each Pharmacy. This final value equates to the National Total to be paid to pharmacies to ensure that the full CPSA Annual Funding Envelope of $376.9m is paid out by District Health Boards ( DHBs ). Review of Community Pharmacy Payments for 2014/15 4

6 National Total to be paid $ excl of GST Total PMR (Step 4) 12,128,620 Less: July FY15 Adustment (91,572) Less: Previous PMR Payments relating to 2014/2015 (10,174,509) National total to be paid 1,862,539 Findings The CPSA payments process for FY15 has been defined by TAS in step-by-step documentation that lists sources and calculations at each step. We have checked the documented process to make sure that the calculations have been carried out correctly and that the process is aligned with the CPSA. Overall we consider the calculation of the National Total to be consistent with the CPSA Stage 4 ( Stage 4 ) and that percentage distributed to providers is correct. We conclude that TAS analysts have applied reasonable and consistent methodology at all stages of the process. This year the Wash-Up process started later than previous years, contributing factors to this were o MOH allowing for 180 days (compared with 120 days in the previous year) for late claims, credits, and resubmits to perform calculations. o The new system for calculations requiring testing by MOH. o The process involving two steps with MOH completing the Final Actual Case Mix Service Fees which TAS then uses as part of the Total PMR calculation (as opposed to a one step process with TAS calculating all parts). We note that this means that the final payments to pharmacies for the period will not be made until 11 months after the end of the period. Mitigating this outcome, we also note that TAS made interim payments out of the Total PMR in April 2015 and November 2015 when it was recognised that there was less expenditure against the forecast envelope spend than expected. The net result is that the final payments are relatively modest. Review of Community Pharmacy Payments for 2014/15 5

7 2. Introduction Deloitte was asked to undertake a review of payments calculated by TAS under the CPSA for FY Purpose and Scope The purpose of this report (the Report ) is to outline our understanding of the process employed by TAS to calculate payments and to ensure that this is consistent with the CPSA. In order to assess the appropriateness of TAS processes the scope of our Report was to: Confirm that the Annual Funding Envelope will have been paid out in full once the Wash-up payment process for FY15 is completed; Review the process and methodology used for completing the FY15 Wash-Up payments to community pharmacies; Ascertain whether the FY15 Wash-Up payment methodology is consistent with the most current CPSA contract; and Advise on any potential improvements in the process to calculate end of year Wash-Up calculation. We have reviewed the calculations performed and the methodology used by TAS with the data they have received from various sources. Our approach for reviewing the end of year calculations performed by TAS has included: Discussions with TAS, their internal audit team and MOH to better understand their approach to calculations. Reviewing the transfer and amendments of source data (from Oracle, PharmHouse and MOH data sources) to the workbook used by TAS to perform the end of year calculations. Out of Scope We have not reviewed the calculations made by the MOH relating to the Final Actual Case Mix Service Fees data provided. We have not reviewed the SQL code used to generate PharmHouse data. Review of Community Pharmacy Payments for 2014/15 6

8 3. CPSA Stage Case Mix Service Fees FY15 marks the shift in the CPSA from Stage 3 to Stage 4 with the introduction of Case Mix Services Fees for LTC Pharmacy services (purchase unit code PH1028) and Core Pharmacy services (purchase unit code PH1001), order type 1 only (a handling fee is also paid on every item dispensed). Transition payments which made up approximately one third of the Annual Funding Envelope in Stage 3 are reduced to zero in Stage 4 along with the removal of ICP. The final month of the Stage 3 was the first month of FY15 (July 2014) with Stage 4 commencing from August 2014 for the remainder of FY15. FY15 is therefore based on one month under Stage 3 and 11 months under Stage 4. The key components under Stage 4 are: Service fees for core and LTC Pharmacy services are funded through the Case Mix Service Fees plus a $1.00 handling fee. Additionally, pharmacies receive an LTC MSF of $20 per month for each registered patient ($240 per annum), compared with $30 per month ($360 per annum) under Stage 3. Specific Pharmacy services continue to be funded through a multiplier of the handling fee as in previous stages of the CPSA. Calculation of the Case Mix Service Fee: There are two scales for the calculation of Case Mix Service Fees one for initial items and one for repeat items. The scales are the same for an LTC Pharmacy services patient and Core Pharmacy services payment. The following diagram shows the calculation of the Case Mix Fee: Relative Value Unit ( RVU ) increases with the number of initial items dispensed by that Pharmacy to that patient on that day ( IPPD ). The RVU decreases as the repeat sequence number increases (Suffix). Pharmacies are paid Case Mix Services Fees monthly in advance using an estimate of dispensing activity using data for the pharmacy from a previous month (seasonally adjusted). For example, the December 2014 advance payment is calculated using actual data from September The Case Review of Community Pharmacy Payments for 2014/15 7

9 Mix Services Fees advance payment is reversed out and the new payment is made once actual dispensing data for the relevant month is available Total PMR To manage the payment of the full Annual Funding Envelope to each Pharmacy, the financial modelling of the Stage 4 proposal includes a notional Total PMR of 1% of the Annual Funding Envelope. Any unallocated funding at the end of the FY15 will form the Total PMR. The value of the Total PMR is paid out based on each pharmacy s market share of LTC Pharmacy services and Core Pharmacy services initials and repeats (inclusive of LTC MSF and all case mix and handling fees, exclusive of negative A3 and J3). From August 2014 to June 2015, there was less expenditure against the forecast envelope spend than expected. DHBs exercised their discretion to distribute some of the Total PMR, resulting in an Interim PMR Payment to support pharmacy cash flow (in April 2015 and November 2015). The following section outlines the steps and calculations undertaken to determine the Total PMR and each pharmacy s share of the Total PMR. The Total PMR is then adjusted for the Interim PMR payment and the July FY15 adjustment under Stage 3 to give the National Total to pay for FY15 so that the full Annual Funding Envelope of $376.9m is paid out by DHBs. Review of Community Pharmacy Payments for 2014/15 8

10 4. Stage 4 - Specific Components For FY15, the CPSA followed Stage 3 for July 2014 and then Stage 4 from August 2014 to June This section describes in detail the steps that TAS performs in order to calculate the National Total to be paid for FY15, and to ensure that the full Annual Funding Envelope of $376.9m is paid out by DHBs. Throughout the year pharmacies receive various service fees from the Annual Funding Envelope based on types of patients and amounts of units dispensed. A portion of the Annual Funding Envelope is retained until all claims have been received, called the Total PMR. The waterfall chart below steps through the calculation of the Total PMR, starting from the Annual Funding Envelope: The July phased amount under Stage 3 is deducted, Followed by the Stage 4 payments (Final Actual Case Mix Service Fees, Community Pharmacy Anti-Coagulation Management Services Payments ( CPAMS ), LTC MSF, handling fees, Brandswitch fees, and Case Mix Quarterly Adjustments) for the remainder of FY15. Finally, Audit recoveries are added back. To get from the Total PMR to the National Total to be paid at end of year for FY15, a further calculation is required. The July 2014 Adjustment under Stage 3 is added to the Total PMR, followed by the removal of the Interim PMR payments made for FY15. The waterfall below summarises the calculation to get from the Total PMR to the National Total to be paid for FY15. Review of Community Pharmacy Payments for 2014/15 9

11 4.1. STEP 1: July 14 Phased Amount The first step taken by TAS is to remove the July 2014 phased amount of $33,546,698 from the Annual Funding Envelope. The July 2014 adjustment is calculated in accordance with the Stage 3 end of year process. This adjustment is then included when determining the National Total to be paid after the Total PMR is calculated for August 2014 to June 2015 under Stage 4, this outlined in step 7. Note that audit recoveries are calculated in step 3 for all of FY15 rather than separating the Stage 3 and Stage 4 recoveries STEP 2 Step 2 outlines the actual payments made for August 2014 to June This step is broken into two parts, firstly explaining the process for Final Actual Case Mix Service Fees, followed by the process for all other payments over the same period STEP 2a: Actual Payments for August 2014 to June 2015: Final Actual Case Mix Service Fees In this step TAS obtain the Final Actual Case Mix Service Fees to remove from the Annual Funding Envelope. During the FY15 Interim Actual Case Mix Fee were calculated based on the actual number of initial and repeat items the Pharmacy dispensed to service users during the relevant service month. Interim Actual Case Mix Fees are used to determine adjustment case mix fee payments, the difference between the advance case mix fee payments and the Interim Actual Case Mix Fees. Due to claims, credits and resubmits submitted beyond the Interim Actual Case Mix Fee cut-off, MOH Sector Operations performs the Actual Case Mix Fee calculation at the end of the year based on data received up to and including 31 December 2015 to determine the Final Actual Case Mix Service Fee payments for August 2014 to June Review of Community Pharmacy Payments for 2014/15 10

12 Payments to pharmacies are the Final Actual Case Mix Service Fees for each of the 11 months and the reversal of all Interim Actual Case Mix Service Fees paid, the difference equating to a final adjustment case mix fee payment. For calculating the Total PMR, MOH Sector Operations provides TAS with an excel file of the Final Actual Case Mix Service Fee payments for each claimant number ('14-15_washup_summary_CaseMix.xls ). This file provided from MOH Sector Operations is used as the data source, rather than the Oracle payment data, for calculating the Final Actual Case Mix Service Fees as it avoids complications around transfers and adjustments between pharmacies and also closed pharmacies. The file contains: The total Case Mix Service Fees (excluding A3J3 Quarterly payments) for each claimant due under the CPSA (regardless of whether the payment/recovery was made or not). This information supports the correct calculation of the Final Actual Case Mix Service Fees. At the individual claimant level, the Case Mix Service Fees owed to the claimant who did the dispensing (regardless of who the payment was made to or whether the payment/recovery was made or not). This information supports the correct calculation of market share. TAS removes GST from the Final Actual Case Mix Service Fees, and the total is then deducted from the FY15 envelope. The table below compares the Interim Actual Case Mix Service Fees paid and the Final Actual Case Mix Service Fees invoices. The total adjustment for FY15 is $111,199 (exclusive of GST). Case Mix Fees $ Interim Actual Case Final Actual Case Mix Fees Paid Mix Invoices Difference August 2014 (18,151,698) 18,151,384 (314) September 2014 (18,471,383) 18,474,327 2,945 October 2014 (18,426,840) 18,440,112 13,272 November 2014 (17,272,699) 17,280,760 8,061 December 2014 (19,393,221) 19,405,423 12,202 January 2015 (16,938,489) 16,952,934 14,444 February 2015 (15,858,858) 15,868,024 9,166 March 2015 (18,160,586) 18,176,314 15,728 April 2015 (16,664,804) 16,673,688 8,884 May 2015 (17,932,976) 17,940,802 7,826 June 2015 (18,264,322) 18,283,307 18,985 (195,535,877) 195,647, ,199 We have checked that the total Final Actual Case Mix Service Fees provided by MOH Sector Operations matches the total Final Actual Case Mix Service Fees used by TAS in determining the Total PMR. We have checked the number of Interim Actual Case Mix Service Fees for pharmacies compared with the number of Final Actual Case Mix Service Fees. There were eight cases where the number of Final Actual Case Mix Service Fees for an individual claimant number were greater than the number of Interim Actual Case Mix Service Fees. We have discussed this with MOH Sector Operations, the Review of Community Pharmacy Payments for 2014/15 11

13 difference being due to these pharmacies not submitting claims, credits and resubmits until after the Interim Actual Case Mix Fee cut-off STEP 2b: All other actual payments for August 2014 to June 2015 In this step TAS removes all other actual payments made. All other actual payments include: Payments sourced from Oracle: o o o CPAMS, LTC MSF, and Case Mix Quarterly Adjustments. Payments sourced from PharmHouse: o o Handling fees, and Brandswitch fees. A summary of these payments from August 2014 to June 2015 is displayed below. Actual Payments Summary - August 2014 to June 2015 $ CPAMS 2,243,419 LTC MSF 29,031,604 Handling Fees* 103,381,453 Brandsw itch Fees 973,154 Case Mix Quarterly Adjustments 80,707 Total 135,710, Oracle Payments The Oracle payments data that TAS receives each month involves some amendments. These include correcting invalid dates, excluding records TAS have been told not to include and adding missing codes. TAS documents the changes for all invoices in an Oracle file correction log with explanations for changes and links to s from MOH confirming records that are to be excluded. We have reviewed the Oracle correction log for CPAMS, LTC MSF, Case Mix Quarterly Adjustments, and Interim PMR Payments and have found 21 corrections relating to 12 invoices. We can confirm that the correction data has correctly been merged with the invoices not requiring correction with the total combined invoices matching the Oracle payment totals used in the Total PMR calculation. Community Pharmacy Anti-Coagulation Management Services Payments ( CPAMS ) $3.5 million of the $376.9 million Annual Funding Envelope for FY15 was set aside for CPAMS payments ( the CPAMS budget ). CPAMS payments actually paid in FY15 totalled $2,403,174 (of which $159,755 was paid in July 2014, with the remainder of FY15 totalling $2,243,419), leaving $1,096,827 unspent out of the CPAMS budget. Review of Community Pharmacy Payments for 2014/15 12

14 From our review we were able to confirm that the Annual Adjustment payment calculated by TAS will result in the entire CPAMS budget for FY15 being paid. The amount unspent within the CPAMS budget of $1,096,827 is included within the Total PMR. LTC Monthly Service Fee Service fees for LTC Pharmacy services are funded through the LTC MSF of $20 per month for each registered patient ($240 per annum) under Stage 4. The LTC MSF payments actually paid in FY15 under Stage 4 totalled $29,031,604, sourced from the Oracle payments file. Case Mix Quarterly Adjustments Quarterly reviews were undertaken to recalculate Case Mix Service Fees for negative A3 and J3 transactions. Case Mix Quarterly Adjustments payments actually paid in FY15 totalled $80,707 sourced from the Oracle payments file. A monthly breakdown of the payments sourced from Oracle is displayed below. Oracle Payments monthly breakdown $ CPAMS LTC MSF Case Mix August ,220 2,723,234 - September ,995 2,706,150 14,371 October ,530 2,678,260 - November ,515 2,639,130 - December ,155 2,646,106 19,875 January ,585 2,643,964 - February ,113 2,596,561 - March ,297 2,619,017 21,650 April ,905 2,583,779 - May ,594 2,594,559 - June ,509 2,600,844 24,811 Total 2,243,419 29,031,604 80, PharmHouse Payments A PharmHouse extract pulls the actual Brandswitch and handling fees paid to individual pharmacies into an Excel file. Handling fees Handing fees are paid for all items dispensed. Credits and resubmitted items are also accounted for within the handling fee component at this stage (credit items are subtracted and resubmitted items are added) and negative A3J3 handling fees are excluded: A breakdown of handling fees by month is displayed below. Review of Community Pharmacy Payments for 2014/15 13

15 Handling Fee Breakdown $ Monthly Handling Fees Credits Resubmits Negative A3J3 Total August ,466,401 (49,687) 51,879 (60,553) 9,408,041 September ,725,913 (49,866) 50,420 (59,737) 9,666,731 October ,833,408 (48,728) 45,373 (57,171) 9,772,883 November ,143,950 (34,266) 26,000 (54,839) 9,080,845 December ,275,060 (98,787) 90,243 (57,017) 10,209,500 January ,955,909 (86,486) 79,688 (43,275) 8,905,836 February ,592,559 (74,222) 67,955 (62,855) 8,523,437 March ,799,871 (41,658) 34,030 (71,714) 9,720,528 April ,045,736 (34,998) 28,664 (65,312) 8,974,089 May ,604,730 (36,584) 28,918 (69,262) 9,527,803 June ,665,323 (35,229) 27,517 (65,850) 9,591,761 Total 104,108,861 (590,511) 530,688 (667,585) 103,381,453 Brandswitch fees $2.0 million of the $376.9 million Annual Funding Envelope for FY15 was set aside for Brandswitch payments ( the Brandswitch budget ). Brandswitch payments actually paid in FY15 totalled $1,194,982 (of which $221,828 was paid in July 2014, with the remainder of FY15 totalling $973,154), leaving $805,018 unspent out of the Brandswitch budget. The Brandswitch nominal expenditure breakdown is displayed below: Brandswitch Breakdown $ Handling Fees Drug Costs Drug Margins Total August , ,751 5, ,764 September ,900 82,074 3, ,189 October ,745 20, ,098 November ,579 19, ,189 December , ,706 5, ,500 January ,085 43,711 1,712 55,508 February ,400 92,671 3, ,700 March ,172 52,710 2,064 66,946 April ,884 90,436 3, ,862 May ,889 56,035 2,195 71,119 June ,593 19, ,280 Total 176, ,381 30, ,154 From our review we were able to confirm that the Annual Adjustment payment calculated by TAS will result in the entire Brandswitch budget for FY15 being paid. The amount unspent within the Brandswitch budget of $805,018 is not allocated to each month individually but rather included within the Total PMR Step 3: Audit Recoveries In this step TAS obtains the identified audit recovery amounts to add back to the Annual Funding Envelope in the next step. MOH Audit and Compliance team audits the payments made to community pharmacy and identifies payments that were recoverable during FY15. TAS is provided with a file from the MOH Audit and Compliance team containing a breakdown of the recoveries identified. $132,761 of recoveries were identified by Audit and Compliance in FY15. Audit recoveries identified are for both Stage 3 (July 2014) and Stage 4 (the remainder of FY15). These recoveries are added back to the Annual Funding Envelope when calculating the Total PMR for Review of Community Pharmacy Payments for 2014/15 14

16 release, regardless of whether affected District Health Boards ( DHBs ) had successfully recovered the respective amounts STEP 4: Determine Total PMR In this step TAS determines the Total PMR by removing the July 2014 phased amount (Step 1) and actual payments (Step 2) from the Annual Funding Envelope before adding back Audit recoveries (Step 3) as outlined below: Step 3: Determine the amount available for release (total PMR) $ FY15 Community Pharmacy Envelope 376,899,969 Less: July FY15 Phased Amount (33,546,698) Less: Actual Payments Aug June 2015 (331,357,412) Plus: Audit Recoveries FY15 132,761 Total PMR 12,128, STEP 5: Determine the market share split by Pharmacy In this step the market share of the Total PMR for each claimant number is determined. Under section H30 of the CPSA Annual Review and unallocated Annual Funding Envelope amount, clause H30.4 explains the method for determining the allocation of the remaining amount of the Annual Funding Envelope not distributed to providers through the payment of handling fees and services fees during the year. Market share of the Total PMR is based on the pro-rata share of the actual handling fees and service fees paid or payable in relation to prescription items dispensed by each provider when providing Core and LTC Pharmacy services over the year, including the LTC MSF as outlined below: Included in the individual Pharmacy Core and LTC payments are: Core and LTC handling fees, LTC MSF, Final Actual Case Mix Service Fees and Case Mix Quarterly Adjustments. Audit recoveries relating to Core and LTC services are subtracted from the calculation. Totals for each of these payments are displayed below. Review of Community Pharmacy Payments for 2014/15 15

17 Total Stage 4 Core and LTC Payments $ Core and LTC Handling Fees 50,632,790 LTC MSF 29,031,604 Final Actual Case Mix Fees 195,647,077 Case Mix Quarterly Adjustments 80,707 Core and LTC Audit Recoveries (31,035) Total 275,361,141 A breakdown of the Core and LTC handling fees is shown below: Core and LTC Handling Fee Breakdown $ Monthly Handling Fees Credits Resubmits Negative A3J3 Total August ,712,703 (28,100) 21,562 (58,405) 4,647,760 September ,814,640 (29,476) 22,911 (57,956) 4,750,119 October ,830,495 (30,161) 24,922 (55,651) 4,769,605 November ,528,865 (15,389) 11,093 (53,246) 4,471,323 December ,103,474 (73,336) 68,441 (55,483) 5,043,096 January ,445,081 (63,255) 58,728 (42,182) 4,398,372 February ,208,061 (53,298) 48,011 (60,115) 4,142,659 March ,809,043 (19,531) 13,595 (68,883) 4,734,224 April ,399,538 (15,475) 10,078 (62,586) 4,331,555 May ,698,825 (15,989) 10,330 (66,850) 4,626,316 June ,786,936 (15,697) 10,280 (63,758) 4,717,761 Total 51,337,661 (359,707) 299,951 (645,115) 50,632, STEP 6: Determine the Total PMR payment per Pharmacy The PMR share is then used to determine each respective Pharmacy s share of the Total PMR: 4.9. STEP 7: Add the July 2014 adjustments by Pharmacy In this step the Total PMR payment per Pharmacy is adjusted for the July 2014 adjustment payment under Stage 3. Total pharmacy adjusted payment $ Total PMR payment (Step 4) 12,128,620 Total adjustment (91,572) Total adjusted payment 12,037, Summary of Adjustments for July 2014 Review of Community Pharmacy Payments for 2014/15 16

18 The July 2014 payment was calculated in accordance with the FY14 end of year process methodology (Stage 3). Summarised below is the July 2014 process under Stage 3. This includes: The total July envelope amount which is used in the calculation of Total PMR July FY15 phased amount. The combined transition payment ( TP ) and the Interim Core Payment ( ICP ) adjustment which is used when determining the PMR payment per pharmacy (determining the percentage) is called July adjustment. A breakdown of individual components for the July 2014 payment is documented in Appendix 1. Transition Pool Summary - July FY15 Adjustment Calculation $ excl of GST July FY15 0 STEP 1 July FY15 Community Pharmacy Envelope 33,546,698 Plus: Audit Recovery amount - Less: Actual Brandsw itch expenditure (221,828) July FY15 Remaining Envelope for Phasing 33,324,870 0 STEP 2 Phasing of Remaining Envelope 33,324,870 0 STEP 3 Less: Actual handling fees expense (Net of Neg A3J3) (9,889,187) Less: Actual CPAMs expense (159,755) Less: Actual LTC expense (4,193,609) 0 Remaining Pool for ICP and Transition Payments 19,082,319 0 STEP 4 Less: ICP portion of Remaining Pool (7,276,773) 0 STEP 5 Remaining Pool for Transition Payments 11,805,547 STEP 8a Transition Payment portion of Remaining Pool 11,805,547 Less: Actual Transition Payments made in July FY15 (11,895,046) 0 Transition Payment Adjustment required (89,500) 0 STEP 8b ICP portion of Remaining Pool 7,276,773 Less: Actual ICP Payments made in July FY15 (7,278,845) 0 ICP Adjustment required (2,073) 0 STEP 9 Combined TP and ICP Adjustment (91,572) 0 STEP 10 Net effect of Negative A3J3 items 66,955 Adjustment excluding Negative A3J3 (158,527) STEP 8: Deduct any previous PMR payments by Pharmacy From August 2014 to June 2015, there was less expenditure against the forecast envelope spend than expected. DHBs exercised their discretion to distribute some of the PMR, resulting in an Interim PMR Payment to support pharmacy cash flow. In this step these Interim PMR payments are subtracted from Step 7 total adjusted payment. This gives the amount to be paid per Pharmacy. This step was also checked and we confirmed that the amount to be paid per Pharmacy reconciles with adjusted payment per Pharmacy (step 6) minus previous PMR payments. Review of Community Pharmacy Payments for 2014/15 17

19 This step is shown in the diagram above. Previous PMR payments relating to FY15 are subtracted from the total adjusted payment. This leaves $1,862,539 to be distributed to the pharmacies based on their percentage calculated in step 5. Total amount to be paid to pharmacies $ Total adjusted payment (Step 7) 12,037,048 Previous PMR payments relating to 2014/15 10,174,509 Total amount to be paid to pharmacies 1,862,539 This step can be checked by summing the total PMR plus the July adjustment and subtracting previous PMR payments. We completed this check (displayed below) and total amount to be paid per Pharmacy is the same as National Total to be paid. Check: Total amount to be paid to pharmacies equals National Total to be paid $ Total PMR (Step 4) 12,128,620 Less: July FY15 Adjustment (91,572) Less: Previous PMR Payments relating to 2014/2015 (10,174,509) National total to be paid 1,862, Next Steps Once the Wash-Up process has been completed the next steps will involve: 1. Confirming instructions from DHB portfolio managers for treatment of transfers and closures Portfolio managers will determine who is to pay in the case of transfers/mergers/closures for transfers and mergers, this will be the latest claimant unless there are exceptional circumstances. 2. Payment notice to pharmacies to be prepared and distributed. 3. Payment files to MOH Sector Operations Including a list of payments to hold (if any) to MOH Sector Operations with agreed payment date. Review of Community Pharmacy Payments for 2014/15 18

20 5. Overall Conclusions Overall we consider the calculation of the Annual Adjustment to be consistent with the CPSA and that TAS analysts have applied reasonable and consistent methodology to calculations throughout the process. Stage 4 was implemented in August As FY15 spans from July 2014 to June 2015, the July payment is calculated under Stage 3 of the CPSA agreement and August to June payments are calculated under Stage 4. During the implementation process of the CPSA there have been four stages. At each stage the process has become more streamlined, leading to a transparent process for Stage 4. The main change in Stage 4 has been the introduction of Case Mix Service Fees which cover both Core and LTC Pharmacy services. The Final Actual Case Mix Service Fees adjustments are calculated and paid by the MOH Sector Operations, meaning the calculations performed by TAS are more straight forward and operationalised. Through this process we have undertaken a review of the calculations and methodology applied by TAS to make sure that the process followed has been in line with the Stage 4 amendments. We have found no calculation errors or cases where the Stage 4 amendments have not been followed. This year the Wash-Up process started later than previous years, contributing factors to this were MOH waiting for 180 days (compared with 120 days in the previous year) for claims, credits, resubmits to perform calculations, the new system for calculations requiring testing, and that the Wash-Up process involved two steps with MOH and TAS performing calculations compared with a one step process with TAS performing all parts. Total PMR was $12,128,620, once the July FY15 adjustment and Interim PMR payments relating to FY15 have been accounted for, the National Total to be paid to pharmacies is $1,862,539. Review of Community Pharmacy Payments for 2014/15 19

21 Appendix 1: July FY15 payment For FY15, the CPSA followed Stage 3 for July 2014 and then Stage 4 from August 2014 to June This section describes in detail the steps that TAS perform in order to calculate final payments under Stage 3 for July STEP 1: Audit Recoveries and Brandswitch Step one of the end of year process is to determine the remaining amount of the envelope to be allocated after adding any audit recovery amount and less the actual Brandswitch expenditure for the year. The calculation performed at this step is summarised in the diagram below and explained further in this subsection: Remaining Envelope for Phasing Total Audit = + - Envelope $33.5m Recoveries July FY15 Brandswitch Audit Recoveries DHBSS Audit and Compliance team audits payments made to Community Pharmacy and identifies payments that were recoverable during FY15. No audit recoveries are included here because all audit recoveries for FY15 are included in Stage 4. Brandswitch Brandswitch payments paid in July FY15 totalled $221, Remaining Envelope for Phasing The table below summarises the calculation of the Remaining Envelope for Phasing: Step 1: Remaining Envelope for Phasing $ July FY15 Community Pharmacy Envelope 33,546,698 Plus: Audit Recovery amount Less: Actual Brandsw itch expenditure (221,828) July FY15 Remaining Envelope for Phasing 33,324,870 Review of Community Pharmacy Payments for 2014/15 20

22 STEP 2: Phasing of Remaining Envelope TAS then calculate the monthly phasing of this remaining envelope based on the original envelope phasing. The original phasing is set at the beginning of the financial year and takes into account seasonal factors. The following diagram and table show the calculation of the new monthly phasing of the remaining envelope: Step 2: Phasing of Remaining Envelope Original $ Envelope Original Phasing % New Monthly Phased July ,546, % 33,324,870 The difference between the original envelope and the new monthly phased envelope is due to the reduction in Brandswitch expenditure. STEP 3: Remaining Pool for Interim Core Payments and Transition Payments The new monthly phased amount is then used to determine the pool available for ICP and TP. The calculation of this pool, the Remaining Pool for ICP and TP, is summarised in the diagram below: Handling fees Handing fees are sourced from PharmHouse and include all order types 1, 3 and 4 and all CPSA purchase units. Credits and resubmitted items are also accounted for within the handling fee component at this stage (credit items are subtracted and resubmitted items are added) and A3J3 handling fees are excluded: Handling Fees Monthly Handling Fees Credits Resubmits A3J3 Handling Fees FY15 Handling Fees July ,965,708 (39,209) 29,643 (66,955) 9,889,187 Remaining Pool for ICP and TP The calculation of the Remaining Pool for ICP and TP is presented in the table below: Review of Community Pharmacy Payments for 2014/15 21

23 Step 3: Remaining Pool for ICP and TP New Monthly Actual CPAMs Phased $ Actual Handling Fees Actual LTC Pool for ICP and TP July ,324,870 (159,755) (9,889,187) (4,193,609) 19,082,319 STEP 4: Interim Core Payment Portion of the Remaining Pool ICP is an interim core payment component that was introduced with the Stage 3 variation to the CPSA. The ICP portion of the remaining pool is then calculated by taking the number of Core initial items (PH1001, order type 1 only) and multiplying this by the ICP unit rate of $2.50: ICP Portion of Remaining Pool Number = x of Core Initials $2.50 ICP Rate Number of Core Initial Items The table below shows a breakdown of how the Core Initial Items are calculated by TAS, including adjustments for Credits (subtracted) and Resubmits (added) and netting off negative A3J3 initial items: Core Initial Items Core Initials PH1001 type 1 Credit Initials Resubmit Initials Negative A3J3 Core Initial Items July ,976,504 (9,826) 7,155 (63,124) 2,910,709 ICP Portion of the Remaining Pool Step 4: ICP Portion of Remaining Pool Core Initial Items ICP Unit Rate ICP Portion of Pool July ,910, ,276,773 Review of Community Pharmacy Payments for 2014/15 22

24 STEP 5: TP Portion of the Remaining Pool TAS then derives the transition pool portion of the remaining pool ( TP Portion ) by subtracting the ICP portion (Step 4) from the Remaining Pool (Step 3) for each month of the financial year: TP Portion of Remaining Pool = Step 3 Remaining pool for ICP and TP - Step 4 ICP portion of the Remaining Pool Step 5: TP Portion of Remaining Pool Pool for ICP and TP ICP Portion of Pool TP Portion of Pool July ,082,319 (7,276,773) 11,805,547 STEP 6: Community Pharmacy Based Dispensing Weighting Steps 6 and 7 involve the calculation of each respective Pharmacy s share of the transition pool. This two-step process first involves calculating each Pharmacy s Community Pharmacy Based Dispensing Weighting ( CommBaseDisp ). The CommBaseDisp is calculated by multiplying the script count for each Pharmacy by that Pharmacy s contracted dispensing ratio for each month: CommBaseDisp for a Pharmacy Script = x count Dispensing ratio Script count Script count in this calculation included in this calculation includes all initial items of Core (purchase unit code PH1001) and LTC (PH1028), order type 1 only. Credits for these scripts are subtracted, resubmits are added and Negative A3J3 scripts are omitted from the count. The script count calculation for July 2014 across all pharmacies is presented in the table below: Script count - Monthly totals across all pharmacies Core PH1001 LTC PH1028 Type 1 Type 1 Credits Resubmits Negative A3J3 Total Script Count July ,976, ,689 (13,114) 10,192 (63,637) 3,418,634 Review of Community Pharmacy Payments for 2014/15 23

25 STEP 7: Market Share Calculation In this step the market shares for each claimant number for July Market share calculation The market share is then used to determine each respective Pharmacy s share of the Transition Payment Pool: STEP 8: Transition Payment and ICP Adjustment Required Step 8 is two-fold, calculating adjustments that are required for both: Transition Payments (step 8a); and ICP (step 8b). Step 8a: Transition Payment Adjustment In step 8a, the transition payment adjustment is calculated on the difference between the amounts that Pharmacy should have received (calculated in step 7) and actual amounts received by Pharmacy throughout the year (Oracle payment file from MOH Sector Operations): TAS performs all the above calculations twice: first, with a file that includes all Negative A3J3 claims; and second, with a file that is net of Negative A3J3 claims: Step 8a: Transition Payment Adjustments Required Including A3J3 Amount should have been paid Oracle Payment TP Adjustment Amount should have been paid Net of A3J3 Oracle Payment TP Adjustment July ,580,782 11,895,046 (314,264) 11,805,547 11,895,046 (89,500) Review of Community Pharmacy Payments for 2014/15 24

26 Netting out Negative A3J3 transactions effectively increases the transition payment pool by c.$224,765 (combination of c.$157,810 from ICP, as shown in step 8b, and c.$66,955 from handling fees, step 3). STEP 8b: ICP Adjustment Required The ICP adjustment is calculated in a similar manner to the transition payment, but instead is focused on ICP (calculated in step 4) and the ICP payments already paid (Oracle payment). ICP Adjustment Required Step 4 = Amount - should have been paid* Amount Paid (Oracle Payment) Again, under this step calculations are performed twice, first including Negative A3J3 claims and second without Negative A3J3: Step 8b: ICP Payment Adjustments Required Including A3J3 Amount should have been paid Oracle Payment ICP Adjustment Amount should have been paid Net of A3J3 Oracle Payment ICP Adjustment July ,434,583 7,278, ,738 7,276,773 7,278,845 (2,073) The Negative A3J3 adjustment effectively decreases the ICP pool by c.$157,810 (Core initial Negative A3J3 items, excluding July, of 63,124 x $2.50 ICP rate). This reduction in the ICP pool is a contributor to increase in the transition payment pool as described in step 8a. STEP 9: Combined TP and ICP Adjustment The combination of steps 8a and 8b represent the total adjustments that need to be made to claimant payment calculations. Step 9: Combined TP & ICP Adjustments Including A3J3 TP Adjustment ICP Adjustment Combined Adjustment TP Adjustment Net of A3J3 ICP Adjustment Combined Adjustment July 2014 (314,264) 155,738 (158,527) (89,500) (2,073) (91,572) Review of Community Pharmacy Payments for 2014/15 25

27 STEP 10: Negative A3J3 impact Step 10 compares the two different Combined TP & ICP adjustments (including and excluding relevant negative A3J3 transactions). Net Effect of A3J3 items Combined TP & = - ICP Adjustments (net of A3J3) Combined TP & ICP Adjustments (incl A3J3) Negative A3J3 Impact Net of A3J3 Including A3J3 Combined TP & ICP Combined TP & ICP Net A3J3 impact July 2014 (91,572) (158,527) 66,955 The net result of this is $66,955, representing the impact of Negative A3J3 on handling fees. The negative A3J3 impact on ICP cancels out, because it decreases ICP by c.$157,810 but also increases the Transition Payment Pool by the same amount. The results of this calculation at an individual Pharmacy level represents each Pharmacy s final A3J3 liability for the month. STEP 11 & 12: Merger & Transfers In this step TAS determines the latest claimant number and name for instances where pharmacies have merged or pharmacies have transferred during the financial year Review of Community Pharmacy Payments for 2014/15 26

28 July 2014 Adjustment The table below shows the combined transition payment and ICP adjustment for July This adjustment is incorporated into determining the PMR payment per Pharmacy for FY15 under Stage 4. Transition Pool Summary - July FY15 Adjustment Calculation $ excl of GST July FY15 0 STEP 1 July FY15 Community Pharmacy Envelope 33,546,698 Plus: Audit Recovery amount - Less: Actual Brandsw itch expenditure (221,828) July FY15 Remaining Envelope for Phasing 33,324,870 0 STEP 2 Phasing of Remaining Envelope 33,324,870 0 STEP 3 Less: Actual handling fees expense (Net of Neg A3J3) (9,889,187) Less: Actual CPAMs expense (159,755) Less: Actual LTC expense (4,193,609) 0 Remaining Pool for ICP and Transition Payments 19,082,319 0 STEP 4 Less: ICP portion of Remaining Pool (7,276,773) 0 STEP 5 Remaining Pool for Transition Payments 11,805,547 STEP 8a Transition Payment portion of Remaining Pool 11,805,547 Less: Actual Transition Payments made in July FY15 (11,895,046) 0 Transition Payment Adjustment required (89,500) 0 STEP 8b ICP portion of Remaining Pool 7,276,773 Less: Actual ICP Payments made in July FY15 (7,278,845) 0 ICP Adjustment required (2,073) 0 STEP 9 Combined TP and ICP Adjustment (91,572) 0 STEP 10 Net effect of Negative A3J3 items 66,955 Adjustment excluding Negative A3J3 (158,527) Review of Community Pharmacy Payments for 2014/15 27

29 About Deloitte Deloitte refers to one or more of Deloitte Touche Tohmatsu Limited, a UK private company limited by guarantee, and its network of member firms, each of which is a legally separate and independent entity. Please see for a detailed description of the legal structure of Deloitte Touche Tohmatsu Limited and its member firms. Deloitte provides audit, tax, consulting, and financial advisory services to public and private clients spanning multiple industries. With a globally connected network of member firms in more than 150 countries and territories, Deloitte brings world-class capabilities and high-quality service to clients, delivering the insights they need to address their most complex business challenges. Deloitte s more than 200,000 professionals are committed to becoming the standard of excellence. Deloitte New Zealand brings together more than 1000 specialist professionals providing audit, tax, technology and systems, strategy and performance improvement, risk management, corporate finance, business recovery, forensic and accounting services. Our people are based in Auckland, Hamilton, Rotorua, Wellington, Christchurch and Dunedin, serving clients that range from New Zealand s largest companies and public sector organisations to smaller businesses with ambition to grow. For more information about Deloitte in New Zealand, look to our website For information, contact Deloitte Touche Tohmatsu Limited. Review of Community Pharmacy Payments for 2014/15 28