Drug Pricing Methodologies AWP, MAC, WAC Whats next

1
Drug Pricing MethodologiesAWP, MAC, WACWhats
next??

• Chuck Gamsu, R. Ph
• Regional Vice President
• EnvisionRxOptions
• September 11, 2008

2
Historical Facts

• Average Wholesale Price (AWP) is the de facto
  standard pricing methodology for drug pricing
  since the 1960s first published in the Red Book
  and Blue Book
• The AWP was originally determined by comparing
  the average price that pharmacies paid for the
  drugs from several drug wholesalers and was
  originally assumed to be the Actual Acquisition
  Cost (AAC) of the retail pharmacies that
  purchased from wholesales
• Today the AWP is compared more to a cars sticker
  price it has little reflection of the true cost
  of the drug which may include wholesaler rebates,
  chargebacks and incentive and volume discounts
• It is important that new methods of pricing be
  introduced to more accurately reflect the actual
  cost of a drug for all payers since it is all
  about to change.

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Historical Facts

• With the introduction of computerized pricing and
  updating, First Data Bank (FDB) and Medispan
  became the standard providers for electronic
  pricing
• Initially, FDB compared average pricing across
  several wholesalers to determine the published
  AWP
• In 2000, FDB started only comparing McKesson
  Wholesales price in establishing the AWP
• With profit margins being eroded by third party
  payers, pharmacies were reeling from lower profit
  margins
• FDB and McKesson set out to change the
  calculation of WAC (the price that McKesson
  allegedly paid from drug manufacturers) from AWP
  minus 20 to AWP minus 25 resulting in higher
  profits for McKessons customers
• This increased the profit margin that pharmacies
  (McKessons customers) were able to make
  regardless of the WAC. This resulted in higher
  prices for all payers both public and private.

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Historical Facts

• In 2007, it was determined by a Federal Court
  that FDB and McK did indeed conspire to fix AWP
  prices.
• FDB agreed to no longer publish the AWP price
  within two years and agreed, along with Medispan,
  to roll back their AWP to pre-2000 percentages,
  that is 20 off of AWP or
• 16 2/3 mark up on WAC
• McKesson now faces repayment penalties of 15
  billion in restitution.
• The Federal government calculates that they will
  save 4 billion annually with the rolling back of
  pricing

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Where pricing is moving

• The implications of this settlement are far
  reaching for pharmacies and PBMs since AWP is the
  basis for most of drug pricing that occurs today
• An alternative means of pricing needs to be
  established which can provide greater clarity
• PBMs, retail, specialty and mail order pharmacies
  are scrambling to add language to their contracts
  that preserves their current profitability and
  give clients an out clause if a new contract
  cannot be established

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Important Pricing Terminology

• Average Wholesale Price (AWP) is a list price
  used for invoices between drug wholesalers and
  pharmacies or other appropriate drug purchasers
  and is typically used as a benchmark for all
  classes of trade without adjustment for
  discounts, rebates, purchasing allowances, or
  other forms of economic consideration. AWP is
  generally set by the wholesaler or drug database
  provider
• Actual Acquisition Cost (AAC) is a transaction
  price used to describe the price paid by a
  pharmacy or provider when purchasing a drug
  product from either a drug manufacturer or
  wholesaler. AAC is meant to be the net price
  after all forms of discount, rebate, purchasing
  allowances or any other forms of economic
  consideration have been taken into account.
  However, many of the discounts that contribute to
  AAC are considered proprietary and confidential
  by drug manufacturers.
• Average Manufacturer Price (AMP) is the average
  price paid to a manufacturer by retail pharmacies
  or by wholesalers for drugs that will be sold to
  retail pharmacies
• Average Selling Price (ASP) is the average price
  that CMS uses to determine the volume-weighted
  price it pays to physicians for certain
  injectible or infusion type drugs for certain.
  The reimbursement is generally 106 of the
  determined price
• Estimated Acquisition Cost (EAC) is the price
  that states pay for their Medicaid drug purchased
  based on a discount from AWP
• Wholesale Acquisition Cost (WAC) is a list price
  used or invoices between drug manufacturers and
  wholesalers and is typically used as a benchmark
  for all classes of trade without adjustment for
  discounts, rebates, purchasing allowances, or
  other forms of economic consideration.
• Maximum Allowable Cost (MAC) is a proprietary
  list of drugs, most commonly generic drugs, used
  by PBMs or health plans to determine the cost of
  drug reimbursement to a Client regardless of the
  Actual Acquisition Cost

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What happens if AWP disappears...

• The entire drug pricing industry is built on some
  form of pricing using AWP
• Retail pharmacies use AWP to determine the
  discounts they give to third party payers and to
  determine their profitability
• Retail pharmacies also use this benchmark to
  determine their Usual and Customary price that
  they charge cash paying patients without
  insurance
• The Usual and Customary price also comes into
  play in the calculation of reimbursement between
  retail and mail pharmacies and PBMs
• The contract between PBMs and pharmacy providers
  generally stipulate that the lowest price
  including the pharmacies usual and customary
  price applies to the reimbursement of drug claims
• Many PBMs increase their profitability by
  creating a spread between what they collect
  from the payer and what they pay the pharmacy
• This disparity can account for a large portion of
  the profitability of a PBM that uses pricing
  spread due mainly to the introduction of highly
  utilized generic versions of blockbuster brand
  name drugs and the price difference between the
  AWP and the Actual Acquisition Cost of many
  generic drugs.
• The loss of benchmark AWP means even more
  transparency in pricing and loss of profitability
  on the dispensing of generic drugs this is most
  evident in cases where the AWP is high and the
  Actual Acquisition Cost is low, sometimes by as
  much as 98.

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Alternative Pricing MethodologiesASP

• CMS has established Average Sales Price (ASP) as
  the basis for reimbursement of physicians who
  prescribed and administer drugs (mostly oncology)
  in their office or infusion suites
• ASP is based on the drugs actual selling price,
  which includes almost all forms of rebates and
  discounts reported to CMS.
• ASP has proven to be substantially lower than
  AWP. Medicare Part B injectibles and infusions
  are priced at 106 of ASP. This has saved CMS
  800,000,000 annually.
• ASP more accurately reflects the true cost of
  purchasing prescription drugs, including
  manufacturer-provided rebates, charge backs, and
  other discounts to purchasers
• This pricing however, can be discriminatory
  because it is volume based and affects those who
  cannot buy in large quantity over those who
  cannot
• ASP severely cuts into the physicians
  profitability when performing in-office
  administration
• Consequently, oncologists may begin sending their
  patients to hospital infusion facilities
  ultimately increasing payers costs
• The issue with ASP pricing, as well as other
  alternative pricing methodologies is the means of
  determining the actual price are ill-defined and
  the appropriateness of such a price, like AWP,
  will hinge on the manner in which it is
  calculated, reported, and employed

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Alternative Pricing MethodologiesAMP

• The introduction of Actual Manufacturer Pricing
  (AMP) was set to become the standard of pricing
  for Medicare Part D, however on May 22, 2006, CMS
  Administrator, Mark McClellan, postponed the
  introduction of AMP pricing and retained the use
  of AWP pricing to the delight of retail
  pharmacists whose already eroding margins were in
  danger of being decreased even more.
• AMP is the price set by the drug manufacturer and
  the price at which they sell to wholesalers or
  pharmacies. AMP may equal WAC but is often times
  less
• Wholesalers then sell the drugs to retail
  pharmacies at either cost or WAC plus a
  percentage mark up or list less which is AWP
  minus a percentage
• The price at which pharmacies purchase drugs from
  wholesalers is then considered their Actual
  Acquisition Cost
• The retail pharmacy then sells their drugs and
  services to consumers at their cost (AMPAAC if
  they buy direct from manufacturer) plus a profit
  to uninsured consumers (the UC). To insureds,
  they charge a negotiated discount off of AWP
  which is now considered the ingredient cost
  plus an appropriate dispensing fee for filling
  the prescription.

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Conclusions

• The proprietary nature of drug rebates and charge
  backs masks the true cost of many drugs
• The AWP is flawed but so are all other forms of
  pricing that cannot be audited or monitored
• Although some pricing methodologies may give a
  truer picture of cost most can be manipulated
• There will be intense pressure to preserve the
  profitability of pricing as it exists today
  otherwise pharmacies and PBMs will see decreases
  in their profitability due to the more
  transparent nature of pricing that will prevail
• AMP for both brand and generic drugs is perhaps
  the most accurate means of pricing the actual
  cost of a drug as determined by the
  pharmaceutical manufacturer with the ability to
  determine the markups along the distribution path
• It is evident that AWP is not going to survive
  and that cost plus models will become the new
  standard for pricing drugs