PBM Pricing Methodologies The Uncertain Future of AWP

1
PBM Pricing MethodologiesThe Uncertain Future of
AWP

• Addressing the Need for Change

2
Introductions

• Hewitts Pricing Methodology Forum Team
• Joshua Golden
• Kristin Begley, PharmD
• Jane Lyons
• Vickie Loranca
• DAT Team Bill Hahn, Litong Sun, Young Lee

3
Forum Objectives

• To discuss Hewitts initial recommendations for a
  future pharmacy benefit pricing methodology,
  incorporating input from all key stakeholders,
• To determine the final proposed
  format/methodology as it pertains to future
  pharmacy financial RFP and contracting activity
  for Hewitt clients, and
• To identify the potential for broader industry
  acceptance of the new proposed methodology.

4
Historical Background

• 1960s Average Wholesale Price (AWP) originally
  developed by State of CA Medicaid program to
  standardize pharmacy reimbursements
• Typically represented 20 markup from Wholesale
  Acquisition Cost (WAC)
• 1980s Adopted more broadly by the managed care
  industry
• 1990s First DataBank (owned by Hearst Corp.)
  evolved as industry-leading provider of AWP data
• 2002 through 2004 First Databank revises AWP
  for most drugs, shifting to a WAC 25 markup
  from manufacturer pricing
• 2004 lawsuit brought against First DataBank
  over calculation methodology
• 2005 First DataBank ceases surveys, freezes AWP
  markup at WAC 25 for most drugs
• 2006 and Beyond Settlement reached, First
  DataBank agrees to change AWP calculation
  methodology and to cease publication of AWP after
  2 years under certain conditions

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The Current Challenge

• AWP continues to be utilized by several key
  players in the pharmacy benefit industry
• Contracts between plan sponsors and PBMs
• Contracts between PBMs and retail pharmacies
• Transition to a fixed-percentage spread between
  WAC and AWP may complicate contractual
  arrangements
• Eventual phase-out of AWP necessitates a
  replacement benchmark metric for standardized
  pricing in the industry
• The pharmacy benefits industry has not as of yet
  presented a coordinated solution

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The Current Challenge
To serve our clients in the future, Hewitt will
require a stable and reliable pricing methodology
for PBM contracting.
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The Current Challenge

• Hewitt seeks a standardized pricing approach for
  the following
• Solicitation and comparative analysis of PBM
  pricing proposals for clients
• Implementation of financial contractual
  guarantees
• Benchmarking/auditing of financial contractual
  guarantees

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The Current Challenge

• The preferred methodology should meet the
  following criteria
• Standardized at the national level
• Updated with sufficient frequency
• Widely available (either in the public domain or
  commercially)
• Good potential for longevity
• Widely accepted by the vendor community
• Applicable for generic/brand drugs and
  retail/mail channels
• Provides good coverage for all NDCs (no data
  gaps)
• Not susceptible to high variability in measuring
  generic prices

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Pricing Terms Definitions

• List of common pricing acronyms
• AWP Average Wholesale Price
• AAC Actual Acquisition Cost
• ABP Alternative Benchmark Price
• AMP Average Manufacturer Price
• ASP Average Sales Price
• DP Direct Price
• FUL Federal Upper Limit
• MAC Maximum Allowable Cost
• MRA Maximum Reimbursable Amount
• NWP Net Wholesale Price
• SWP Suggested Wholesale Price
• WAC Wholesale Acquisition Cost

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Pricing Terms Definitions AWP

• Average Wholesale Price
• Nationally-tracked pricing index that currently
  serves as the basis of several key relationships
  in the pharmacy industry
• Also referred to as Blue Book AWP (BBAWP) by
  First DataBank
• Was purported to be based on surveys of multiple
  wholesalers in the past, but now is calculated
  using a straight multiplier of WAC (for most
  brand drugs)
• Has been called a vestige of a drug-distribution
  system that disappeared in the early 1980s.
  (Medical Marketing Economics)
• Considerations
• Now tied directly to WAC price for many NDCs
• Not reflective of actual pricing dynamics in the
  marketplace
• May be phased out within the next couple years

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Pricing Terms Definitions AAC

• Actual Acquisition Cost
• The true transactional cost of acquisition for
  a specific buying entity
• Closest representation to the true cost of a
  drug, including discounts, buying incentives,
  rebates, etc.
• Considerations
• Varies considerably by buying entity
• Typically considered proprietary data, not
  publicly available
• Not viable as a nationally standardized benchmark

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Pricing Terms Definitions ABP

• Alternative Benchmark Price
• Published by First DataBank beginning in March
  2005 as an alternative benchmark to AWP.
• Based on manufacturers WAC (or if WAC is not
  available, the Direct Price)
• WAC/DP 25 for prescription drugs
• ABP is not reported for any drug that does not
  have either a WAC or DP
• Considerations
• Tied directly to WAC, very similar to the new AWP
  calculation
• Not available for all NDCs (for instance, those
  that lack a WAC/DP)

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Pricing Terms Definitions ASP

• Average Sales Price
• Transactional index calculated by CMS, based on
  manufacturer-supplied data
• Weighted average price, based on actual
  transactions
• Intended for use with reimbursements for Medicare
  Part B drugs that are administered in physicians
  offices.
• Considerations
• Only reported quarterly by manufacturers, so
  private sector application is not appropriate.
• Lag time for data to be made publicly available
  is typically 6-12 months
• Aggregated and blended across purchaser types
  (health care providers, retailers, wholesalers),
  making it less relevant to one particular class
  of trade

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Pricing Terms Definitions DP

• Direct (Non-Wholesaler) Price
• Reported by manufacturers
• Represents the price at which the manufacturer
  sells the drugs to non-wholesalers
• Does not necessarily represent the actual
  acquisition price by the non-wholesaler, as
  discounts, rebates, and other price
  reductions/incentives may apply.
• Considerations
• May be provided by manufacturer in addition to
  (or in lieu of) WAC price
• Generally not available where WAC price is not
  provided

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Pricing Terms Definitions FUL

• Federal Upper Limit Price
• Price list used by CMS in calculating
  reimbursements under the Medicaid program
• Also referred to as the CMS Maximum Allowable
  Cost (MAC) List or the HCFA MAC List
• Set independently by the federal government and
  by individual states
• Calculated as a straight-line multiple (150) of
  the published price of the lowest-cost therapy in
  a group of therapeutically equivalent drugs
• Only assigned when multiple generic equivalents
  are available (2 or more)
• Considerations
• Not available for all NDCs (focuses on
  multi-source products), so not viable as a
  single-benchmark solution for brands and generics
• Variations by state may prevent standardization
• Data collection process is inconsistent, and
  timeliness issues exist with submission

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Pricing Terms Definitions MAC/MRA

• Maximum Allowable Cost
• Developed independently by PBMs, health plans,
  and other providers.
• Also referred to as Maximum Reimbursable Amount
  (MRA)
• Represents a unit price for a generic drug, and
  is applied consistently to all versions of the
  same generic.
• Developed to deal with variations in pricing from
  one generic distributor to another
• Considerations
• Generally used only for generic drugs
• May vary widely by provider in terms of breadth
  (inclusion of generic NDCs) and depth (unit
  price)
• Can be modified by providers with little or no
  plan sponsor oversight

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Pricing Terms Definitions SWP

• Suggested Wholesale Price
• Reported by manufacturers, it is the suggested
  price that a wholesaler might charge customers
  (i.e. retail pharmacies, hospitals, etc.)
• Developed to deal with variations in pricing from
  one generic distributor to another
• Currently published by First DataBank and other
  data providers
• Considerations
• SWP is merely a suggested price the actual
  price charged by a wholesaler is determined by
  that wholesaler
• Not always made available for all drugs
• Arbitrarily set by manufacturers using
  proprietary methodology, and thus not a reliable
  metric for standardized pricing

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Pricing Terms Definitions AMP

• Average Manufacturer Price
• Reported by manufacturers
• Average price that a manufacturer sells a drug
  directly to retail pharmacies.
• Intended for use with Medicaid reimbursements
• Considerations
• Public availability is limited, with only
  quarterly internet postings planned
• AMP data involves a lag of months, making it
  inappropriate for tracking drug prices in the
  private sector
• Faces harsh criticism by the retail pharmacy
  industry, with accusations that the metric
  underestimates actual acquisition costs (and may
  thus threaten profit margins for the retailers)

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Pricing Terms Definitions WAC

• Wholesale Acquisition Cost
• Reported by manufacturers, it is the catalog or
  list price for a drug product being distributed
  to wholesalers
• Also referred to as Net Wholesale Price (NWP) by
  First DataBank
• Available in the private sector through data
  providers (FDB, MediSpan)
• Does not represent the actual transactional price
  at the wholesaler level (these transactions may
  include discounts, rebates, or other pricing
  incentives)
• Considerations
• WAC is not published for all drugs many NDCs
  (particularly older generics) do not have a
  reported WAC price. Some estimate this to be 20
  of generic NDCs.
• May vary widely for a specific generic drug by
  generic manufacturer/distributor
• Set by manufacturers, and not audited across
  manufacturers by any regulated oversight process

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Pricing Terms Definitions Summing It All Up
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WAC A Closer Look

• Advantages
• While not a transactional index, it is a better
  representation of true acquisition cost when
  compared to AWP
• WAC has historically been the closest reported
  price to the actual transaction price for
  pharmaceuticals between the manufacturer and
  wholesalers or other large direct purchasers,
  given the lack of public data on actual
  transaction prices. (Bank of America Equity
  Research Report, December 2006)
• Updates occur frequently
• Benchmark is readily available via multiple data
  providers

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Evaluating WAC Against Our Criteria

• The preferred methodology should meet the
  following criteria
• Standardized at the national level
• Updated with sufficient frequency
• Widely available (in the public domain or
  commercially)
• Good potential for longevity
• Widely accepted by the vendor community
• Applicable for generic/brand drugs and
  retail/mail channels
• Provides good coverage for all NDCs (no data
  gaps)
• Not susceptible to high variability in measuring
  generic prices

? ? ? ? ? ? X X
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WAC NDC Coverage Issues

• Percent of Claims With No NDDF WAC Available
  (Retail Mail Combined)

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WAC NDC Coverage Issues

• Percent of Claims With No NDDF WAC Available

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WAC Generic WAC Price Variability Issues

• From Medicaid and Medicare Drug Pricing White
  Paper1
• The relationship between list prices (AWP and
  WAC) is much less predictable for generic drugs
  than it is for brand name drugs Even more
  volatile is the relationship between the list
  prices (AWP or WAC) and actual acquisition cost
  for generics.
• Generic firms often discount their actual net
  price to the pharmacy to compete with other
  generics, but they do not always reflect these
  discounts in lower AWP or WAC list prices.
• Generic prices are also relatively volatile,
  because the market for generic drugs is
  effectively a commodity market.
• 1 Medicare and Medicaid Drug Pricing Strategy
  to Determine Market Prices, S. Schondelmeyer,
  ABT Associates, August 2004.

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WAC Addressing the Issues

• Possible approaches to address WAC data issues
• Exclude NDCs with missing WAC data from pricing
  proposals/contracts
• Use alternate pricing benchmark (AWP, DP, AMP,
  etc.) to fill gaps
• Use generic reference WAC (average, median, or
  other calculation based on all other similar
  generics) to fill gaps
• Use predecessor brand WAC to fill gaps
• Use alternate pricing benchmark for ALL generics
• Use generic reference WAC for ALL generics
• Use predecessor brand WAC for ALL generics

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WAC Addressing the Issues

• Excluding non-WAC NDCs
• Easiest of the approaches to implement
• Exclusion is not desirable, allows room for
  pricing ambiguity
• Providers (mail centers, pharmacies) will have
  incentive to inventory/dispense non-WAC products
• Providers could modify use of specific NDCs to
  increase non-WAC dispensing rates
• Does not solve issue of generic WAC variability

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WAC Addressing the Issues

• Using Alternative Pricing Benchmark
• Fairly easy to implement
• Several benchmarks available to choose from
• Multiple benchmarks add complexity
• Increased challenges for audit and accountability
• Potential for game-play by selectively dispensing
  certain NDCs to increase/decrease non-WAC
  dispensing rates
• Most relevant alternative benchmark (AWP) likely
  to be phased out
• May not solve issue of generic WAC variability

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WAC Addressing the Issues

• Using Reference WAC
• Could be applied across ALL generics to calculate
  a single WAC for each GCN
• Would use average, median, min/max, or other
  reference calculation
• May be difficult to standardize calculation
  methodology across entities
• Frequency of update for calculations may be a
  concern, especially with new-to-market generics
• May not work for generics with one or two
  suppliers (SSGs lack comparative data to
  calculate Reference WAC)
• Complicated calculations required, with increased
  challenges for audit and accountability

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WAC Addressing the Issues

• Using Predecessor Brand WAC
• Offers a high success rate for populating missing
  WAC data
• Could be applied across ALL generics to calculate
  a single WAC for each GCN
• Could easily be applied across ALL generics
• Stabilizes the high variability of generic WAC
  pricing across similar generics
• Encourages purchasing patterns based on lowest
  cost per unit, instead of focus on optimizing
  spread
• Allows for use of single benchmark across
  delivery channels and drug types
• May be challenging to standardize calculation
  methodology

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Hewitts Recommended Methodology

• Utilize Predecessor Brand WAC for ALL Generic
  NDCs
• Identify ALL generic NDCs
• Identify Formulation ID group for each NDC
• Cross-reference against other NDCs in Formulation
  ID group to identify the best-matched brand NDC,
  accounting for package size
• Assign best-matched brand WAC to the generic NDC

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Hewitts Recommended Methodology

• Identify ALL generic NDCs using a standardized
  identifier process
• Process must rely on data readily available from
  the major data providers (FDB, MediSpan)
• Process must be standardized
• Use of Generic Product Indicator (GPI) and/or
  Generic Indicator (GI) codes to properly identify
  generic status

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Hewitts Recommended Methodology

• Identify Formulation ID group for each claim
• Clinical Formulation ID (GCN_SEQNO) Code in FDB
• Formulation ID (GCN) Code in FDB
• Groups drugs according to generic ingredient(s),
  drug strength(s), and route of administration,
  and dosage form

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Hewitts Recommended Methodology

• Cross-reference against other NDCs in Formulation
  ID group to identify the best-matched brand NDC
• Must account for package size of claim
• May involve multiple iterations or sweeps of
  the data
• Link-up process must be standardized across
  entities

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Hewitts Recommended Methodology

• Assign best-matched brand WAC to the generic NDC
• Predecessor Brand WAC utilized for generic NDC,
  regardless of availability of generic WAC
• Final methodology must address situations where
  no brand match can be found (i.e. where brand has
  been removed from the market)
• Exclude from guarantee?
• Use the generics own WAC?
• Use standardized AWP formula?

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Hewitts Recommended Methodology - Challenges

• Accounting for Package Size in predecessor brand
  lookup
• Dealing with brands that have no WAC price
• Dealing with GCNs that have no predecessor brand
• Maintaining consistency in determining
  brand/generic status

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AMP Future Outlook

• Advantages of AMP
• AMP is a transactional index (instead of a list
  price)
• More accurately reflects actual market dynamics
• May contribute to continual downward price
  pressure on drug prices
• Recent changes to AMP methodology may improve the
  metric
• More timely data (monthly submissions)
• More accurate data (standardization of
  calculation)
• More availability (public distribution)
• Some questions remain on timing for implementing
  changes

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AMP Future Outlook

• Industry Criticisms of AMP
• AMP underestimates acquisition costs
• May threaten profit margins of retailers
• AMP data is inherently outdated
• Retrospective data requires review of historical
  time periods, and is released with a lag
• Current lag is up to 5 months
• Lag to be reduced with recent methodology changes
  by CMS
• AMP lacks transparency, and is not widely
  available
• Issue may be resolved with CMS ruling

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AMP Future Outlook

• Industry Criticisms of AMP
• AMP inappropriately includes prompt-pay discounts
  
• Incentives should be retained by the purchaser
• Inclusion in AMP will discourage the incentives
• AMP discourages generic dispensing
• Margins would be higher on higher cost drugs
• Could be resolved by applying higher differential
  or higher dispensing fee for generics
• AMP will result in a large increase in dispensing
  fees
• Is this bad?

40
AMP Future Outlook

• Industry Criticisms of AMP
• Final CMS Medicaid Reimbursement Rule Shows
  Reckless Disregard for Patient Welfare by
  Threatening Viability of Independent Community
  Pharmacies (NCPA)
• CMS Assaults Neighborhood Pharmacies With New
  Rule Cutting Reimbursements For Generic Medicaid
  Drugs. (ACPCN)