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Published in Chain Drug Review by authors: George Kitchens and Elsevier’s Gold Standard President, Marianne Messer

The need for a new drug price benchmark has been a key concern for pharmacy industry leaders since First Databank announced that it would remove the Average Wholesale Price (AWP) from its database back in 2010. Industry leaders from across the drug supply chain agree with the benchmark criteria for a new standard price drug type outlined in the September 2010 issue of the Journal of Managed Care Pharmacy (September 2010).  According to the article, the price benchmark designed to replace average wholesale prices (AWP) must fulfill these standards:

  • Transparency: The benchmark must bear a genuine relationship to the actual acquisition cost of the drug. In addition to this “relevance” definition, transparency also refers to being “understandable.”
  • Accessibility: The benchmark must be readily accessible to and adoptable by the pharmacy industry.
  • Comprehensiveness: The benchmark must be available for all branded and generic drug groups. Initial files from the Center for Medicare & Medicaid Services (CMS) included Average Manufacturer Price (AMP) for only a portion of drug groups with no clear timeline for the addition of other drug groups.
  • Timeliness: The benchmark must be updated with a frequency appropriate to quickly changing actual acquisition costs– especially for generic products.
  • Manipulation: The benchmark is immune to manipulation.

Other important criteria include administrative simplicity, durability, stability, auditability, freedom from anti-competitiveness and acknowledgement of distribution complexity.

CMS proposes the National Average Drug Acquisition Cost (NADAC) and has begun the process of surveying randomly selected pharmacies from a national pool of independent and chain pharmacies asking them to, voluntarily submit monthly invoice data for drug purchases made over the previous 30 days.  After CMS collects and compiles the data, it calculates and publishes a national average drug acquisition cost, typically with a two month time lag.  For example, data collected in November is published in January.

However, the NADAC price type is not yet widely available.  Moreover, it fails to meet all criteria for a satisfactory national standard, see Table A.

Table A shows how alternatives to AWP measure up against a consolidated version of the desired criteria:

AAC

AMP

ASP

EAC

FUL

MAC

MLP

WAC

NADAC

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

Immune to manipulation

N

N

N

N

Y

N

N

N

Y

Simple

N

N

N

N

N

N

N

N

N

Because none of the alternatives to this point have met the desired criteria, AWP largely remains the drug price standard.  But a new drug price type has been introduced, which may meet the need.

The Case for PAC

Developed by Glass Box Analytics, the Predictive Acquisition Cost (PAC) combines a range of data sources and employs the same predictive analytics techniques used in financial services to determine credit worthiness (FICO) to estimate the true cost of drug acquisition.  Estimating drug acquisition costs in a transparent, defensible way, PAC is more closely aligned with true drug acquisition cost than any other available drug price type.  It also supports pricing analytics, contract negotiations, and claims reimbursement processing.

The strength of PAC rests in its reliance on multiple factors, including industry MAC benchmarks, published price lists, existing price benchmarks, behavioral metrics, supply-demand measures and survey-based acquisition costs.  Together, these variables deliver an analytics model that accurately predicts acquisition cost.  While no single data source identifies true acquisition costs, the data sources collectively deliver a level of accuracy sufficient to meet pricing needs.

Is PAC superior to AWP in tracking actual acquisition costs?  According to Glass Box Analytics, independent studies show that PAC pinpoints acquisition costs within 15 percent for more than half of all drug groups, while the AWP-based model is able to do so for less than 10 percent of drug groups.  Data comparing NADAC with AWP or PAC with NADAC is not yet available.

In the PAC Vanguard

Elsevier/Gold Standard, the exclusive distributor of PAC, explains that PAC can be used for more accurate analysis of drug spending,  facilitate the selection of and contract negotiations between suppliers, payers, PBM’s, and retail pharmacies,   audit support, and contract renewals.  Retail pharmacists can also use PAC for reimbursement analysis and cash price basis.

PAC has emerged as an effective benchmark that appears to meet all of the industry criteria for a new benchmark.  The way in which PAC is derived, as well as its sources, is completely transparent. It is comprehensive, covering all active brand and generic drugs.  PAC also excels in timeliness thanks to daily updates that address changing acquisition costs.  Any change in an input data point can translate into a change in the PAC output for a drug and full PAC input is regenerated daily.  And it is safe from manipulation because PAC is informed by a variety of carefully designed inputs.  PAC is available to all industry professionals by subscription, whether or not they happen to be customers of Elsevier/Gold Standard.

It is ultimately for the industry as a whole to decide which drug price type will be used as the new standard. Undoubtedly, as NADAC becomes more widely available, comparisons between it, PAC, and other drug price types will emerge. And that is as it should be. Only by testing each price type to see which most consistently tracks true acquisition cost will we arrive at a reliable benchmark. For now at least, PAC is looking like the best bet.

Comments
  1. At least a start, but still not at the core of finding actual aquisition pricing, particularly from the manufacturer to wholesalers, the PBM’s and the chains, leaving the independent Pharmacies even with purchasing groups in the dark about what the drugs actually cost.

    • The Predictive Acquisition Cost (PAC) is designed to estimate the typical acquisition cost for an independent pharmacy. The intent is to establish a price type that serves as an appropriate starting point for negotiation versus existing price types in the market that have very little correlation to actual acquisition cost. The PAC is tuned specifically to independent pharmacies since they tend to pay the highest acquisition cost compared to other pharmacy providers.

      With regards to large organizations like retail chain pharmacies and their acquisition cost… if a PBM is negotiating with a retail chain and the PBM feels the retail chain has some purchasing advantages, it is still up to the PBM to negotiate against those advantages versus the drug price benchmark doing that for them. What is sometimes lost in the market, when discussing acquisition cost for a retail chain organization, is that there are many costs (e.g. warehousing, transportation) that are built into the price an independent pharmacy pays when purchasing through a wholesaler that the chain pharmacy takes on itself when purchasing direct from the manufacturer.

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