Making Sense of Prescription Drug Pricing

Mark Frisse

To understand the pricing of prescription drugs, one must wade through a number of acronyms and concepts that have evolved over time and, in this writer's opinion, obfuscate rather than clarify pricing. Understanding the history of prescription drug pricing seems important if one is to develop a transparent pricing approach. But here is an irony, although CMS has the authority to ensure that where applicable manufacturer's sales information on average manufacturer price and best price are correct (see below), the Social Security Medicare Part D legislation requires that this information be kept confidential and hence it is not publicly available.

Terms

Average Wholesale Price (AWP).

"The AWP has often been equated with a “sticker price” or “list price,” as those terms are used in the automobile industry. It has become an important prescription drug pricing benchmark for payers throughout the health care industry. Payments are typically based on AWP minus some percentage. Despite its name, however, the AWP is not an accurate reflection of actual market prices for drugs. As noted, it is a price derived from self-reported manufacturer data for both branded and generic drugs. There are no requirements or conventions that the AWP reflect the price of any actual sale of drugs by a manufacturer, or that it be updated at established intervals. It is not defined in law or regulation, and it fails to account for the deep discounts available to various payers, including certain federal agencies, providers, and large purchasers, such as HMOs. Consequently, the AWP has been the subject of great criticism and scrutiny." (Source: Wikipedia)

Wholesale Acquisition Cost (WAC).

The price a wholesaler pays to a manufacturer for a drug. It is a published price that does not include rebates or discounts. Sometimes called the "catalog price." (Source: Gencarelli)

Average Manufacturer’s Price (AMP).

The average price paid to manufacturers by wholesalers (less discounts) for a particular dosage form and strength of a prescription drug distributed solely to the retail pharmacy class of trade. The AMP is not a published price. It is calculated by the manufacturer and submitted to CMS for purposes of calculating the Medicaid rebate. (Source: Gencarelli)

Maximum Allowable Cost (MAC).

The highest price a health plan or other intermediary will pay for medications. This cost figure becomes most relevant when there are more than two generic options available for the drug. Maintaining a list of these costs across all drugs is, as one document describes it, "tedious and expensive."

Federal Supply Schedule (FSS).

Obtained from market transaction data reported by manufacturers. In general, FSS may not be higher than the lowest price charge by the manufacturer for non-federal purchasers. That is, the federal government should never pay more than any other plan or intermediary. Some federal bodies (e.g., the VA) set price according to FSS.

Federal Upper Limit (FUL).

This is a ceiling paid when there are more than three generic options available. It is set at 150% of the least costly therapeutic equivalent that can be purchased by pharmacies in quantities of 100 tables. (Source Gencarelli)

Estimated Acquisition Cost (EAC).

This is the other upper limit complementing the FUL. EAC is a state's estimate of price paid by providers for a drug. It is often used for single-source (e.g., "brand") drugs. Most states use AWP to calculate EAC.

Average Sales Price (ASP).

The average of all final sales prices charged for a prescription drug in the United States to all purchasers (including mail order pharmacies) excluding those sales that are exempt from inclusion in the “best price” for Medicaid drug rebate purposes. Defined by the OIG-mandated corporate integrity agreement with TAP pharmaceuticals.

Usual and Customary Charge.

The common charge to the public for a prescription drug.

References

AWP (Wikipedia) Medicaid Prescription Reimbursement by State (CMS). A comprehensive Web resource.
Follow the Pill: Understanding the U.S. Commercial Pharmaceutical Supply Chain. Health Strategies Consultancy for the Kaiser Family Foundation (March, 2005) Dawn M. Gencarelli (June_7, 2002). "
Average Wholesale Price for Prescription Drugs: Is There a More Appropriate Pricing Mechanism?" (pdf). National Health Policy Forum. Includes definitions of all terms. Appendix 1 contains Medicaid dispensing and cost sharing as of 2002 for each state. It is instructive. Office of the Inspector General (2002).
Actual acquisition costs of generic prescription drug products. Office of the Inspector General (2002).
Additional analysis of the actual acquisition cost of prescription drug products. Abramson, et. al.
Generic Drug Cost Containment in Medicaid: Lessons from Five State MAC Programs. Health Care Financing Review. Spring 2004. 25 (3), 25-34. HHS Office of the Inspector General (October, 2003).
State Strategies to Contain Medicaid Drug Costs (OEI-05-02-00680).
HHS Center for Beneficiary Choices. Lower Cash Pricing (October 11, 2006). Describes the CMS approach to Wal-Mart $4 generics and similar programs.
HHS Center for Beneficiary Choices. Scope of work: State-to-State Plan Reconciliation (July 7, 2006). Describes the data fields (including "usual and customary charge") that will be submitted by states to Public Consulting Group (PCG) to study costs incurred by states for dual-eligible and low-income subsidy entitled beneficiaries during their transition to Medicare Part D. States will then work with CMS and its contrator to establish reimbursement parameters based on eacch state's liability for either primary or secondary payment under Part D claims.

How this works.

First, a state determines a dispensing fee. Examples abound. Second, a state determines a reimursement for ingredient costs. This is often AWP less some percent (usually 5-15%) or WAC + some percent (around 5%) - whichever is lower. Remember that the federal government pays some portion of the charge, depending on the state. (Follow this link to the Kaiser Family Foundation's table of federal matching rates.) The rate in Tennessee for 2007 is 63% and the rate in Florida is 58%. States or other intermediaries then receive rebates from manufacturers equal to some percentage of the AMP. It is higher (15% a good number) for "sole source" drugs (e.g., "brand names) and a bit lower (around 10%) for multi-source drugs (e.g., generics). Sometimes the rebate is the difference between the AMP and the best price. Sometimes it is further increased if prices exceed the CPI or other inflation indicators. The Federal rebate amount is the same for all states and established by 42 U.S.C. 1296r-8(a).