Stay ahead of the curve.

The Average Wholesale Price (AWP) has long been the drug price benchmark for establishing reimbursement payment terms between payers, PBM’s, and pharmacies. Created in 1969 by George Pennebaker to address the need for a reference price to adjudicate California Medicaid drug claims, AWP became the standard nationwide as the shift from paper to real-time drug reimbursement claims required the use of common pricing fields. However, as early as the 1980’s, industry pundits referred to AWP as “ain’t what’s paid” because of the common and significant gap between AWP and the actual acquisition cost of a drug.

Derivation of AWP

AWP, as published in the major drug compendia, comes from three potential sources:

  • Reported directly from the manufacturer
  • Calculated as Wholesale Acquisition Cost (WAC) plus 20 percent
  • Calculated as WAC plus 25 percent

With the exception of the Gold Standard Drug Database, which has always distinguished between reported and calculated figures, AWP was commonly published as a single price type, regardless of how it was derived.

Criticism and Withdrawal of AWP

Critics have long charged that AWP is not an average at all and is subject to manipulation and artificial interpretation. The pricing benchmark was implicated in a Medicare Part B fraud investigation for being at least partly to blame for the fact that Medicare was consistently billed more than drugs actually cost. In 2005, a lawsuit was filed by the Prescription Access Litigation (PAL) project, which alleged a conspiracy to arbitrarily increase AWP.

As a result of that lawsuit, First Databank (FDB), the original publisher of the AWP price type, chose to exclude AWP from its drug price data. Due to the allegations about AWP and FDB’s withdrawal of it, interest in a finding a new standard drug price type for reimbursement and claims adjudication grew and has become more urgent.

Alternatives to AWP

AWP is by no means the only price type available. Listed here, with brief descriptions, are others that are available but have not been commonly used for reimbursement purposes:

Actual Acquisition Cost (AAC) – Final price paid by the pharmacy after subtraction of all discounts
Average Manufacturer Price (AMP) – Manufacturer reported price for Medicaid drug rebate program
Average Sales Price (ASP) – CMS calculated price for Medicate Part B drugs
Estimated Acquisition Cost (EAC) – Estimated cost of the product or the pharmacies’ usual and customary charge
Federal Upper Limit (FUL) – CMS calculation for the upper amount to be paid in aggregate for multi-source products
Maximum Allowable Cost (MAC) – Defined by each payer for multi-source drugs
Manufacturer List Price (MLP)- Price listed by the drug company
Wholesale Acquisition Cost (WAC) – List price for a drug sold by a manufacturer to wholesaler, not including discounts

New Price Benchmark

Industry leaders and interested parties have engaged in an active dialogue about establishing a new drug price benchmark, largely agreeing that the criteria suggested by the Journal of Managed Care Pharmacy (September 2010) captures the characteristics needed. The benchmark criteria for a new standard price type are:

  • Accessible
  • Timely
  • Administratively simple
  • Comprehensive
  • Durable
  • Stable
  • Easily understood
  • Transparent
  • Auditable
  • Trustworthy
  • Not anti-competitive
  • Acknowledges distribution complexity

A brand new price type, the National Average Drug Acquisition Cost (NADAC), which is based on voluntary surveys of pharmacy invoices, has been proposed as the new standard. However, it is not yet widely available and it does not meet all of the essential criteria for a satisfactory national standard.

The following table shows the currently available alternatives to AWP and how they measure against a consolidated version of the desired criteria:

Transparent Y N N N Y N N N Y
Accessible N N N N Y N Y Y Y
Comprehensive N N N N N N N N N
Timely N N N N N Y Y Y N
Non-Manipulatable N N N N Y N N N Y
Simple N N N N N N N N N

Unfortunately, neither the eight existing alternatives nor the new NADAC meet the desired criteria. So, for the time being, AWP is still used as the industry standard.

Although Elsevier/Gold Standard is committed to supplying AWP for as long as our customers require it, we also believe that the scrutiny it has received over recent years has brought to light not only AWP’s flaws, but those of other price types. A new standard that more closely meets criteria to satisfy all facets of the industry should, and likely will, be found.

We would like to hear from you about drug price types/benchmarks and the best direction for future standards. Some questions to consider:

Has the use of AWP as the industry standard for reimbursement driven up the cost of pharmaceuticals for health plans and employers?

Do you think that any of the existing drug types come closer to meeting the transparent, accessible, comprehensive, timely, unable to manipulate and simple to administrate criteria?

Is the proposed NADAC a viable alternative? Is it in the best interest of pharmacies to respond to the survey with the requested invoice data?

What would be the benefits/consequences to health plans, PBM’s and retail pharmacy of a price type that is close to true acquisition cost?

Which price type would you like to see as the industry standard for reimbursement?

Please feel free to make any relevant comments, ask questions and provide suggestions for additional information. Drug information technology specialists from Elsevier/Gold Standard will monitor and facilitate discussion.

  1. Which Industry Are You Referring to? Retail? PBM’s? Mail-Order? Closed Door Long Term Care? Internet? As you can see there are many costs that will not be freely given. PBM’s may buy from overseas’ direct sources in large amounts and repackage them with an inflated AWP and have been doing so for quite some time. Independent pharmacies have sued for these abusive tactics and are still embroiled in legal molasses for over 10 years with no end in sight. How is it that PBMs may demand steep discounts and act as a closed door pharmacy but sell to retail clients? Is delivering in a mail box as opposed to having a person ring a door bell and hand a medication to a patient constitute a different class of trade worthy of an 18% cost difference (PBM’s average discount over retail cost)? Does packaging a week’s worth of medication and delivering to Long Term Care 4 times a month (with 4 times the fees) become the most cost effective method? And does that constitute enough diffe4rence from a retail pharmacy delivering once a month (or 4 times a month if you want) for the Long Term Care pharmacy to rece3ive steep discounts over retail? If independent pharmacies could negotiate collectively they would still be the largest suppliers of meds to the population. If you added WalMart to the equation you would skew the cure totally to retail. As you can see the same formula for all of the industry is not something that can be done, fairly. But then nothing about the retail pharmacy trade has been fair!

  2. Interesting article. Perhaps there will soon be a new benchmark to replace AWP.

  3. Very informative. Well worth the read.

  4. It is good to see somebody opening the discussion with a clear statement of the problem. Obviously I have been an observer as well as participant. My primary observation is: The free enterprise system requires that the seller and the buyer meet and agree on the price. The sellers are the drug manufacturers (not the pharmacies). The primary buyers are government entities and private insurance companies. All of the others are furnishers of services (not drugs) and should bargain with those that they serve.

    The only other methodology that could work would require one of the members of the drug supply chain to be totally transparent – making ALL of its financial data available.

    The current condition is that the free enterprise system is working everywhere except in the United States. The buyers (primarily governments) are bargaining with the manufactrers and getting good prices. The U.S. has one outstanding exception. California’s Medicaid program (Medi-Cal) sits down with the manufacturers and bargains, resulting in huge rebates that are paid by the manufacturers directly to the State. (Note: I have not been directly involved so I do not know any of the agreed upon details, but I do know the annual total dollars and they are VERY high.)

    Since no company will make financial data totally available, the only viable solution that I see is to change things so that the free enterprise system can take effect and solve the problem.

  5. No disagreement that AWP is a flawed concept, but why do we the pharmacies need to do the leg work for voluntary surveys? I think that our wholesalers could with our permission provided that data much easier, and quicker without errors. Some accepted methodology so like size and type pharmacies could be tracked together.

    One of the problems now is that we often get paid below our net cost for items because somewhere in the U.S. some wholesaler is selling an item as a loss leader. I’ve had this happen when generic Xalantan was costing us between $11-$12 and we were losing money when the PBM’s had the price pegged at $8 because one generic wholesaler had it priced that low. So the $8 was a come on and now that price is gone, but the PBMs still are hanging there hats on the $8 even though you’d be hard pressed for buy any at that price.

    • Rick,

      I like your point – but at some point you have to look at the big, clouded picture in front of you and say, “Hey, this kind of looks familiar.” There are no loss-leaders for Wholesalers or Manufacturers. There are no losses. Period. To say that losing money on a drug occurs would be an act of price-fixing (a violation of PDMA Law) on behalf of the seller of these supposed loss-leader sales. If someone is selling something low; chances are they buy it in high-volume due to their client-base and patient-demographics/location, get a damn good price on it due to volume and don’t jack the price up on their clients to match (price-fix) what their competitors sell it for elsewhere – because they have no idea what their competitors sell it for … some wholesalers have extreme overhead costs and some don’t. It’s not the PBM’s fault if you’re in a “locked” contract with a wholesaler who doesn’t allow you the right of free enterprise to venture out there and acquire drugs at realistic prices to create competition and make prices competitive amongst ALL wholesalers and Manufacturers again. If you are able to get that drug for that price and then HAVE the best priced drug in your area – go get it. No one is going to sue you for providing legitimate, lower-cost drugs to your customers. If they do, good luck to ‘em and paying that jury handsomely. If some company wants to lower or eliminate your discount rates because you do what’s for the greater good of your patient-base – point to the cellphone industry and the lawsuits that eliminated “no-out, 2-year” contracts and ultimately found themselves in violation of restricting free trade . You gotta unite. Unless of course you’re not an independent pharmacy owner.

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