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What Is the Price Benchmark to Replace
Average Wholesale Price (AWP)?
Frederic R. Curtiss, PhD, RPh, CEBS; Phillip Lettrich, RPh; and Kathleen A. Fairman, MA
A
n article on the front page of the Wall Street Journal
on October 6, 2006, thrust into the public media the
otherwise esoteric controversy concerning the use of
average wholesale price (AWP) as the primary basis for reimbursements to pharmacies for pharmaceuticals in the United
States.1 Although used widely for nearly 40 years, AWP had
been criticized prior to this investigative report as unreliable, subject to manipulation, and not representative of the
actual purchase price for pharmaceuticals.2-4 The Wall Street
Journal article, based on a tentative settlement of litigation in
which First DataBank (San Francisco, CA) and the McKesson
Corporation (San Francisco, CA) were accused of unilaterally increasing AWPs, included the findings that (a) at least
since 2003, AWP was not based on calculation of an “average”
wholesale price but instead reflected the pricing of McKesson
Corporation, a single drug wholesaler; and (b) AWP had
undergone a systematic change beginning in 2001 when First
DataBank had converted its markups of wholesale acquisition
cost (WAC) to a common multiplier of 1.25,1 effectively increasing the AWP by 4% for AWPs that were previously calculated
using a multiplier of 1.20.
In March 2009, the future of AWP became uncertain as a
result of circumstances surrounding the court settlement of
the litigation that had begun in 2005 against First DataBank.
On March 17, 2009, U.S. District Court Judge Patti B. Saris
approved the proposed settlement of 2 civil action lawsuits
filed by private health plan payers of pharmaceuticals against
the 2 largest publishers of AWP, First DataBank (along with
wholesaler McKesson) and Medi-Span (Indianapolis, IN, subsidiary of Wolters Kluwer Health).5 On March 30, 2009, Judge
Saris signed a final order and judgment certifying the class
(of “Private Payor” purchasers) which settled 2 national class
action lawsuits against the 2 largest publishers of AWP.6 As part
of the formal settlement, Medi-Span and First DataBank agreed
to adjust the markup factor used to calculate AWP downward
to 1.20 times WAC “for any prescription pharmaceutical” that
had “a mark up factor basis from WAC to AWP in excess of
1.20” for the 1,442 specific national drug code (NDC) numbers
that were listed in the court complaint.6
The “rollback” of AWP as a result of reducing the WAC/DP
(direct price) multiplier to no more than 1.20 was implemented
by First DataBank and Medi-Span on September 26, 2009, 180
days from the date of the judgment, as ordered. At the same
time, these AWP publishers voluntarily implemented price
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modifications to all products that had a WAC markup greater
than 1.20. This decision expanded the list of NDC numbers
from the 1,442 specified in the lawsuit to well over 50,000
items.7 The expanded list included both prescription and
nonprescription (over-the-counter [OTC]) items, both active
and inactive NDC numbers on the drug database, as well as
a variety of markup factors. The adjusted AWPs had markup
factors that ranged from 1.20 to 1.33. About two-thirds to
three-fourths of the NDC numbers with adjusted AWPs had a
pre-settlement WAC markup of 1.25.7
This U.S. District Court decision on March 30, 2009,
was also accompanied by separate announcements from the
defendants Medi-Span and First DataBank that they would
voluntarily discontinue publication of AWP. First DataBank
announced that its voluntary discontinuation of publication
of AWPs would be “no later than two years following the date
that the Blue Book AWP adjustments noted above are implemented.”8 Medi-Span announced that it would discontinue
publication of “current AWPs for all products in the MediSpan files within approximately 2 years of March 30, 2009.”9
Therefore, according to these announcements by the 2 largest
and most widely used publishers of drug price data, the voluntary discontinuation of publication of AWPs would occur
on or before March 30, 2011, for Medi-Span and on or before
September 26, 2011, for First DataBank.
It is important to note that the litigation and court decision
did not address or affect the cost of the products (i.e., pharmacy purchase prices were unaffected by these AWP changes).
Rather, the AWP rollback affected the AWPs published by the
compendia and could have a secondary effect on reducing
pharmacy reimbursement when based on AWP.
Two other drug database publishers of AWP with less market share, Gold Standard (Elsevier, Atlanta, GA) and Red Book,
did not make announcements in 2009 that they would discontinue publication of AWP. On April 8, 2010, Thomson Reuters
(New York, NY), the publisher of the Red Book, announced
that it would continue to provide AWP in addition to other
drug price information including WAC, DP, suggested retail
price (SRP), and federal upper limit (FUL).10 Similarly, on May
18, 2010, Gold Standard announced that it too would continue to publish AWP, taking direct aim at the competition:
“Gold Standard reports all drug pricing standards utilized and
required within the industry, and we intend to continue doing
so. … We understand the frustrations felt by those who rely on
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What Is the Price Benchmark to Replace Average Wholesale Price (AWP)?
TABLE 1
Alternative Business Strategies in Responding to the AWP Rollback
Strategy
1. Readjust the AWP reduced by the rollback to the former
multiplier (i.e., creating a “legacy” AWP).
2. Recontract with pharmacy providers using a new (lower)
AWP discount.
3. Recontract with pharmacy providers using a new price
benchmark.
4. Recontract with pharmacy providers using combination
(equivalent) price benchmarks.
5. Do nothing or some other strategy.
AWP = average wholesale price; WAC = wholesale acquisition cost.
Description – Example
If the former multiplier was 1.25 X WAC, the new reduced AWP is recalculated by
using the pre September 26, 2009 ratio (e.g., 1.25 divided by 1.20).
If the former discount for brand drugs was 84% of AWP (i.e., AWP – 16%), then the
new discount might be 87.5% of AWP (AWP – 12.5%).
WAC is used as the new price benchmark. If the former AWP discount was 16%, the
new contract rate might be WAC + 5%.
WAC and AWP are used as the price benchmarks with the new AWP discount
(e.g., AWP – 12.5% = WAC + 5%).
AWP and expect stability and dependability from their drug
databases. We look forward to providing a reliable and flexible
resource for pricing industry-wide, including AWP and any
new benchmarks…”11
The countdown to discontinuation of AWP was interrupted
on June 29, 2010, when Medi-Span reversed its earlier position
and announced that “based on comments from our customers
and other industry participants” it would “publish AWP (or a
similarly determined benchmark price) until relevant industry or governmental organizations develop a viable, generally
accepted alternative price benchmark to replace AWP.”12 This
announcement of course left First DataBank in a difficult position as the only current publisher of AWP on record as planning to discontinue publication of AWP.
Effects on Payers of the AWP Rollback
in 2009 and Payer Response
When Medi-Span and First DataBank “rolled back” the WAC/
DP multiplier to no more than 1.20 on September 26, 2009,
these 2 publishers voluntarily reduced the multiplier to no
more than 1.20 for all NDC numbers for which the WAC or DP
multiplier was greater than 1.20. For the NDC numbers where
the former multiplier was 1.25, the AWP reduction was 4%,13
derived from dividing the 5-point reduction by the former multiplier 1.25. The overall effect on all brand AWPs was different
for each payer, determined by the utilization and dollar mix of
affected and unaffected NDC numbers. The overall effect was
a reduction in composite brand AWP of less than 4% because
of the dilution effect from the brand NDC numbers that were
already priced at a multiplier of 1.20 prior to the rollback.
Pharmacy benefits management companies (PBMs) and payers could respond to the reduction in AWP with one or perhaps
more than one strategy (Table 1). The strategic response to
the AWP changes for each PBM or payer depended in part on
the anticipated availability of AWP past the dates announced
by Medi-Span and First DataBank. The authors determined,
through discussions with representatives of many PBMs and
health plans, that the following strategies were adopted prior
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to, and implemented concurrently with, the rollback that
occurred in September 2009. Strategies 1 through 4 delivered
a “cost neutral” effect, whereby the price of the drug remained
constant to the payer and provider in spite of the change in the
reference price (AWP). Strategy 5 resulted in a cost reduction to
the payer and a lower reimbursement to the provider.
1. Readjust the multiplier to 1.25 (or other previous value)
from the post September 26, 2009 multiplier of 1.20 for the
NDC numbers that were adjusted downward to the 1.20
multiplier, thereby returning the AWP to its (legacy) value
prior to the rollback.
2. Use the “new” reduced AWPs as received from Medi-Span
and First DataBank and revise payer-provider contracts
to reduce the size of the discount (e.g., 84% of AWP
[AWP – 16%] revised to 87.5% of AWP [AWP – 12.5%]).
3. Revise payer-provider contracts using a new price benchmark (e.g., WAC + 5%).
4. Revise payer-provider contracts to incorporate multiple
solutions, such as equating WAC plus to AWP minus (see
example in Table 2).
5. Do nothing.
The variety of actions implemented across PBMs and payers has not been assessed and reported, understandably since
the actions represent business decisions made in a competitive marketplace. However, some information is available that
suggests that the strategic responses varied among PBMs and
payers. For example, one large PBM-payer announced that it
would “recontract the entire retail pharmacy network … to
maintain comparable aggregate pharmacy reimbursement and
ensure that our networks remain stable.”14 This announcement
suggests that this PBM-payer adopted strategy #2 (Table 1).
State Medicaid programs apparently did little or nothing
in response to the rollback (i.e., reduction) of AWP prices in
September 2009. For example, the state of Tennessee notified
its TennCare pharmacy providers on September 18, 2009,
that “At this time, there are no plans to change our pharmacy
reimbursement methodology as a result of this ruling.”15 The
result of doing nothing was reduced cost to the payer, at the
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What Is the Price Benchmark to Replace Average Wholesale Price (AWP)?
TABLE 2
Example of Calculation of Neutral Pricing for Pharmacy Reimbursement
NDC 00071-0156-23
Ingredient Cost
AWP – 16% Example
Unit AWP
AWP at Quantity = 90
AWP Minus 16%
AWP Minus 12.5%
$4.77144
$429.43
$360.72
$4.58055
$412.25
$360.72
Unit WAC
WAC at Quantity = 90
WAC + 5.0%
Pre 09.26.2009 WAC
$3.81711
$343.54
$360.72
Post 09.26.2009 WAC
$3.81711
$343.54
$360.72
Pre 09.26.09 AWP is derived from WAC multiplied by 1.25; post 09.26.09 AWP is derived from WAC multiplied by 1.20.
AWP = average wholesale price; mg = milligrams; NDC = national drug code; WAC = wholesale acquisition cost.
Lipitor 20 mg tablet
Pre 09.26.2009 AWP
Post 09.26.2009 AWP
expense of the provider, (e.g., if the previous AWP-based reimbursement was $4.77 per unit, the new reimbursement was
4% lower or $4.58 per unit). The TennCare announcement did
include a notice that specialty pharmacy rates would be revised
and posted on or before September 23, 2009, because specialty
pharmacy “rates are subject to a much deeper discount off of
AWP and were implemented at a time after AWP had been
inflated.”15
Presumably, the business strategies adopted in 2009 to
adjust to the reduction in AWP were developed in anticipation
of events that would follow the rollback of AWP that occurred
in September 2009. Although Medi-Span and First Databank
were on record to discontinue publication of AWP as early
as March 2011, a majority of PBMs and health plans either
anticipated the continued availability of AWP or were unable to
decide at that time on a suitable alternative pricing benchmark.
The uncertainty surrounding the continued availability of AWP
precipitated discussions by public and private stakeholders
regarding possible replacement benchmarks and revised payment methods for pharmaceutical products.
AMPAA-NASMD Recommendation
for Alternative Price Benchmarks
One of the early recommendations for an alternative price
benchmark to replace AWP was rendered in November 2009
in a “white paper” from the American Medicaid Pharmacy
Administrators Association (AMPAA) and the National
Association of State Medicaid Directors (NASMD).16 AMPAA
had formed a committee of 13 state Medicaid pharmacy
directors that presented its findings from an initial meeting
in October 2009 to a work group composed of AMPAA and
NASMD members in November 2009. The AMPAA-NASMD
work group recommended “a single national benchmark”
based on “actual average acquisition cost.” Because national
average actual acquisition cost (AAC) is not presently available,
this AMPAA-NASMD work group recommended that “WAC
accompanied by a well-designed MAC [maximum allowable
cost] program may provide an interim alternative but should
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Dispense Fee
Total
$1.75
$1.75
$362.47
$362.47
$1.75
$1.75
$362.47
$362.47
only be viewed as a temporary solution” because WAC prices
“are currently available for many, but not all drugs” and
because WAC “may be susceptible to the same concerns that
rendered AWP ineffective.”16
Application of the Principle of Best Benchmark Criteria
The announcement by the 2 most widely used publishers
of AWP that they would discontinue publication, by March
2011 for Medi-Span and September 2011 for First DataBank,
precipitated a great deal of discussion about the benchmark
that might be used to replace AWP. The white paper from
AMPAA-NASMD in November 2009 described a process
that evaluated the characteristics of alternatives to AWP and
included the note that unlike AWP, WAC has a definition in
statute.16 Specifically, in the Social Security Act in the section
pertaining to average sales price (ASP), WAC is defined in subsection (c)(6)(B) as “the manufacturer’s list price for the drug
or biological to wholesalers or direct purchasers in the United
States, not including prompt pay or other discounts, rebates or
reductions in price, for the most recent month for which the
information is available, as reported in wholesale price guides
or other publications of drug or biological pricing data.”17 Also
indicative of widespread stakeholder interest in the issue, in
2010 the National Council for Prescription Drug Programs
(NCPDP) convened a focus group “to discuss the options for a
new benchmark to replace AWP.”18 The focus group met twice
in early 2010 and again in May 2010, when it was identified as
an NCPDP Special Committee.18
As in any important policy change, a key component of the
decision-making process will be identification of the criteria
by which alternatives will be judged; various stakeholders are
likely to have differing views about what those criteria should
be and how they should be weighted. The authors have prepared the following definitions of possible alternative benchmarks that might be considered as replacements for AWP and
have proposed some criteria (Table 3) that might be used to
evaluate these AWP alternatives. Presumably, these and other
criteria will be assessed by others, prioritized, weighted, and
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What Is the Price Benchmark to Replace Average Wholesale Price (AWP)?
applied to current and as yet undefined price benchmarks to
identify an alternative to AWP that will stand the test of time.
Actual Acquisition Cost (AAC)
AAC is the final price paid by the pharmacy provider after subtraction of all discounts. AAC prices are not reported or publicly available and would have to be determined by pharmacy
self-report or audit of actual pharmacy invoices. Furthermore,
using the AAC as an alternative to AWP would require determining whether the AAC is calculated per pharmacy site, per
pharmacy chain, per pharmacy association buying group, or
some other segmentation. AAC is purchaser (provider) specific
and therefore not a benchmark. A variation could theoretically apply if AACs are combined and a mathematical mean or
median value is determined for a group of like pharmacy
providers. Such an “average” AAC, as recommended by the
AMPAA-NASMD work group, could be determined for pharmacies by type (e.g., mail order, chain community pharmacy,
independent community pharmacy) or by geographic region.
For example, the state of Alabama Medicaid program in 2010
began posting the results of its audits of community pharmacy
invoices in Alabama.19 The state of Alabama contracts with a
third party to conduct audits of pharmacy invoices twice per
year, for the invoice months of December and June, and each
pharmacy in the state is required to participate once every 2
years. The third-party audit firm calculates an average AAC
value for each generic code number (GCN [Formulation ID];
for each drug and strength by dosage form, such as fluoxetine
20 milligram [mg] capsules) separately for brand and generic
drugs. The average AAC values are publicly available as part
of the “Alabama State MAC List.”20 Average AAC values are
presented in 2 lists, separately for brand drugs and for generic
drugs, and as of June 2010, the 2 price lists include the notice
that these average AAC values per unit are “not effective for
current reimbursement.”20
Assessment of AAC as a Benchmark. At the present time,
AAC fails nearly all of the best benchmark criteria. AAC is not
readily available, and it is administratively complex and expensive to determine. Timeliness is problematic because AAC
values that are determined from invoice prices at a given point
in time are immediately outdated. Also, practical definitions of
AAC would necessarily employ a method to calculate average
or median AAC values because it would be unimaginable to
administer a system that reimburses individual pharmacy providers based on their own individual AACs. Reimbursement
based on pharmacy-specific AAC would also reduce the financial incentive for competitive buying because pharmacy-purchasers would simply pass on their cost of goods to payers.
Although AAC has significant shortcomings, national AAC
prices came one step closer to reality with the release on
July 16, 2010, of a request for proposal issued by the Federal
Business Opportunities office on behalf of the Centers for
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TABLE 3
Best Benchmark Criteria and
Alternative Price Benchmarks
Best Benchmark Criteria
Alternative Price Benchmarks
1. Accessible – readily available
AAC – actual acquisition cost
2. Timely
AMP – average manufacturer price
3. Administratively simple and efficient ASP – average sales price
4. Comprehensive
AWP – average wholesale pricea
EAC – estimated acquisition cost
5. Durable (not an interim solution)
FUL – federal upper limit
6. Stable (won’t produce more
MAC – maximum allowable cost
litigation)
MLP – manufacturer list priceb
7. Easily understood
WAC – wholesale acquisition costc
8. Transparent and unambiguous
9. Auditable
10. Trustworthy
11. Not anticompetitive
12. Acknowledges complexity of drug
distribution system
a AWP may also be referred to as suggested wholesale price (SWP) when supplied
by the manufacturer.
bMLP might replace AWP as a multiple of WAC and would be reported by the
manufacturer rather than calculated by the publisher of drug price data.
cWAC may also be referred to as direct price (DP) or list price (LP).
Medicare & Medicaid Services (CMS) for the conduct of “a
monthly nationwide survey of retail community pharmacy prescription drug prices and the generation of publicly available
pricing databases ... [to] afford State Medicaid agencies a valid
array of covered outpatient drug prices from ingredient costs
paid by retail community pharmacies to those prices available
to the consumer.”21
Average Manufacturer Price (AMP)
AMP is a manufacturer-reported price that was mandated by
Congress as part of the Medicaid drug rebate program in the
Omnibus Budget Reconciliation Act (OBRA 1990). AMP is
defined in section 1927(k)(1)(B) of the Social Security Act as
“the average price paid to the manufacturer for the drug in the
United States by wholesalers for drugs distributed to the retail
pharmacy class of trade,” excluding “customary prompt pay
discounts extended to wholesalers.”22 The Office of Inspector
General (OIG) estimated in June 2005 that the median AMP
was approximately 77% of AWP for single-source brand drugs,
72% of AWP for multiple-source brand drugs, and 30% of AWP
for generic drugs.23
Prior to the Deficit Reduction Act of 2005 (DRA), AMP was
used by CMS at the federal level to calculate manufacturer
rebates owed to the Medicaid program. DRA required that
CMS make the AMP data available to state Medicaid programs
on a monthly basis beginning July 1, 2006, providing the
opportunity for state Medicaid programs to use AMP as the
basis for reimbursement.24 DRA 2005 also established AMP
as the basis for determining the FUL amounts, calculated as
250% of the AMP for the drug with the lowest AMP, thereby
replacing the former FUL calculation based on 150% of the
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lowest published price. In July 2007, CMS issued final regulations that addressed the AMP provisions of the DRA including
the definition of the “retail pharmacy class of trade” to include
“sales including discounts, rebates, or other price concessions
provided to [PBMs] for their mail order pharmacy purchases.”25
Medicaid reimbursement based on AMP for multiple-source
(generic and brand) drugs was delayed by the Medicare
Improvements for Patients and Providers Act of 2008 (MIPPA)
(Public Law 110-275).26
Assessment of AMP as a Benchmark. AMP is closely related
to AAC and has an advantage in trustworthiness; it is unlikely
to be overstated because (a) it is the basis of calculation of
the amount of rebate owed to the Medicaid program by the
pharmaceutical manufacturer, and (b) the chief executive officer of each drug manufacturer must attest to its authenticity.
Weaknesses of AMP include lack of timeliness, lack of availability, and lack of fairness across classes of trade. However,
the latter disadvantage of AMP may be overcome at least in
part by its redefinition in the Affordable Care Act of 2010
(the combination of P.L. 111-148, the Patient Protection and
Affordable Care Act [PPACA, enacted March 23, 2010], and
P.L. 111-152, the Health Care and Education Reconciliation
Act of 2010 [HCERA, enacted March 30, 2010]) to remove
from the calculation of AMP certain discounts that were not
available to all purchasers, such as discounts offered to mail
order pharmacies.27 There appears to be future opportunity for
AMP as a pharmaceutical price and reimbursement benchmark
for private as well as public programs as a result of revision of
the calculation method defined in the Affordable Care Act of
2010 and with anticipated public availability of AMP as early as
January 2011. However, until that time, AMP remains unavailable, and questions about transparency cannot be answered
until AMP becomes available in the marketplace. AMP also has
the significant shortcoming of a lack of timeliness because it is
determined retrospectively.
Average Sales Price (ASP)
ASP is calculated by CMS from manufacturer-reported prices
for “sales to all purchasers,” excluding sales that are exempt
from Medicaid “best price” and sales at “nominal charge.”17,28
ASP is based on actual transaction price data and includes
virtually all discounts and rebates, defined as “net of any price
concessions, such as volume discounts, prompt pay discounts,
cash discounts, free goods contingent on purchase requirements, chargebacks, and rebates other than those obtained
through the Medicaid rebate program.”29 ASP is therefore
a near-actual net purchase price. ASP replaced AWP as the
basis for reimbursement for pharmaceuticals in Medicare Part
B (primarily physician-administered injectables) on January
1, 2005, as a result of the 2003 Medicare Prescription Drug,
Improvement, and Modernization Act (MMA) (Public Law 108173), and the method of calculation of ASP changed on April 1,
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2008.29 Payment to Medicare providers is 106% of ASP except
for reimbursement at 104% of ASP, effective January 1, 2009,
for Part B drugs that are separately reimbursable in hospital
outpatient departments.30
Assessment of ASP as a Benchmark. ASP is favorable by
several best benchmark criteria including transparency and
present use in the marketplace. However, it is not a reasonable
replacement of AWP as a benchmark because of its limited
scope. ASP is available only for Medicare Part B covered drugs,
which account for only about 2% of outpatient prescriptions.
ASP also fails best benchmark criteria because it is calculated
retrospectively and therefore lacks timeliness. ASP values
reported to CMS by manufacturers lag real-time transactions by
2 calendar quarters.4 ASP is also not specific to NDC numbers,
making it impractical for use in pricing and reimbursement
for prescription drug claims submitted using NDC numbers.
The primary opportunity for ASP might lie in expanding the
scope of ASP to more, if not all drugs, but this expansion is not
anticipated at this time.
Average Wholesale Price (AWP)
AWP is a list price for drugs published in commercial publications (or drug price compendia). Two companies’ compendia
(Medi-Span and First DataBank) are used as the basis of pricing most pharmacy claims in the United States. Two other
recognized drug price data sources for drug price information
including AWP are Red Book (Thomson Reuters) and Alchemy
(Elsevier Gold Standard). When AWP is supplied by the manufacturer, it is identified by the drug price compendia as suggested wholesale price (SWP). If the manufacturer-labeler does
not supply the compendia with an SWP, AWP is calculated
by the compendia using a markup applied to the WAC or DP
supplied by the manufacturer-labeler. The markup factor may
be lower than 1.20 but not greater than 1.20 as a result of the
AWP rollback that occurred on September 26, 2009; however,
a manufacturer may supply an SWP that is greater than a
markup of 1.20 times WAC/DP.12 Each AWP/SWP is specific
to an 11-character (technically 10 characters with a “0” fill)
NDC number that is composed of 3 segments to identify the
(a) manufacturer or (re)labeler (4 or 5 characters); (b) product
code (drug, strength, and dosage form and formulation; 3 or 4
characters); and (c) package code (1 or 2 characters).31
Assessment of AWP as a Benchmark. Although AWP survived for 40 years as the basis for pharmacy reimbursement
of pharmaceutical ingredient cost, it was never intended to
represent actual transaction prices in the marketplace.32 AWP
is favorable according to many best benchmark criteria including the higher-value attributes of timeliness, accessibility,
comprehensiveness, administrative simplicity, and low administrative cost. However, AWP is less favorable by the criteria of
trustworthiness and transparency. Moreover, the business
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strategy adopted by many PBMs and payers in 2009 that
adjusted (restored) the “new” (post September 2009) AWP to
the pre September 2009 AWP (strategy 1, Table 1) by introducing a “legacy” multiplier of WAC added to the complexity by
creating multiple AWPs. The pejorative connotation associated with “AWP” is evident, including the description by U.S.
District Court Judge Patti B. Saris in a court decision in June
2007 of a “flawed AWP system” that permitted defendant drug
manufacturers to act “unfairly and deceptively by causing the
publication of false and inflated average wholesale prices.”33
This court decision referred to AWP as “ain’t what’s paid” and
“fictitious” and introduced a “speed limit” for the margins
between AWP and the actual purchase price.34 It is possible
that some of the criticism of AWP could be overcome by adopting an alternate name, such as “manufacturer list price,” “standard list price,” or “reference price.”
Estimated Acquisition Cost (EAC)
EAC is the basis for state Medicaid reimbursement for covered
outpatient drugs. Federal regulation 42 CFR 447.512 requires
pharmacy reimbursement to be the lesser of (a) EAC plus “reasonable dispensing fees” or (b) the pharmacy “providers’ usual
and customary charges to the general public.”35 Each state
Medicaid agency determines EAC for pharmacy reimbursement, and EAC is defined in federal regulation 42 CFR 447.301
as “the [state Medicaid] agency’s best estimate of the price
generally and currently paid by providers for a drug marketed
or sold by a particular manufacturer or labeler in the package
size of drug most frequently purchased by providers.”36 EAC is
therefore intended to represent an actual transaction price that
is an estimate of AAC. As of March 2010, 11 states used WAC
(or direct price) in some way to reimburse pharmacy providers
for pharmaceutical ingredient cost, including Rhode Island,
which CMS lists as using WAC exclusively for reimbursement
of brand and generic drugs, with no state MAC.37 As of March
2010, almost all of the remaining states and the District of
Columbia used discounted AWP solely or primarily to determine EAC.
Assessment of EAC as a Benchmark. EAC is not a published
price and is therefore not accessible or readily available. EAC is
not used for transaction pricing, and its use for pharmacy reimbursement would require a methodology for its determination.
Presumably, a survey of wholesalers or pharmacy purchasers
would be necessary to determine EAC. The use of EAC for
pharmacy reimbursement would have the drawbacks associated with AAC including administrative complexity, expense
in price data collection, and prices outdated almost immediately upon determination (i.e., lack of timeliness).
Federal Upper Limit (FUL)
FULs are calculated and published by CMS and represent the
maximum amount that state Medicaid programs can pay for
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multiple-source generic pharmaceuticals. FUL may also be
referred to as federal MAC or FED MAC, CMS MAC, or even
HCFA MAC (referring to the former name of CMS, Health
Care Financing Administration). FUL was created in 1987,
and prior to 2007, each FUL was calculated as 150% of the
lowest price for a drug from “the prices published nationally
in three drug pricing compendia” for drugs rated “A” in the
U.S. Food and Drug Administration’s Approved Drug Products
with Therapeutic Equivalence Evaluations (Orange Book).38 The
DRA of 2005 redefined the calculation of FUL as 250% of “the
lowest AMP rather than 150 percent of the lowest published
price for therapeutically equivalent products,” effective January
1, 2007.24 CMS started sending AMP data monthly to state
Medicaid programs in July 2006, as required by DRA 2005, but
states were not required to base reimbursement on these data.39
MIPPA (July 15, 2008) delayed implementation of FULs based
on AMP to no earlier than October 1, 200940 and prevented
CMS from making any AMP “publicly available” prior to that
date.26 However, MIPPA was superseded by the Affordable Care
Act of 2010, including redefinition of FUL as 175% of AMP, and
redefinition of the calculation of AMP.27
Assessment of FUL as a Benchmark. Although FUL prices
are widely available, the products with FUL prices are not comprehensive. FULs are intended to serve as benchmark prices for
multiple-source products (generic and brand) but are not applicable to single-source products. FUL prices are also not timely
because they are determined retrospectively and updates are
published infrequently.
Maximum Allowable Cost (MAC)
MAC is defined by individual PBMs or payers (commercial or
governmental) for reimbursement of multiple-source drugs.
Each formulation (e.g., tablet, capsule, or gram) of a drug and
strength has a MAC price that is determined by the PBM or
health plan from actual or estimated transaction prices in
the marketplace and other price information such as FULs.
Individual state Medicaid programs may maintain their own
MAC price lists with MAC prices that are no greater than the
FULs. MAC values may also be established for multiple-source
drugs that do not have FULs.41 MAC price lists in the private
sector are usually considered proprietary and are generally not
available or accessible.
Assessment of MAC as a Benchmark. State MAC prices and
FULs are accessible, but private sector MAC price lists are not
accessible or readily available. MAC prices are not applicable
or present for single-source drugs. MAC also falls short of
best benchmark criteria for transparency and trustworthiness.
However, MAC is well accepted in the private sector as a procompetitive method for pharmacy reimbursement for multiplesource drugs.
Vol. 16, No. 7
September 2010
JMCP
Journal of Managed Care Pharmacy 497
What Is the Price Benchmark to Replace Average Wholesale Price (AWP)?
Wholesale Acquisition Cost (WAC)
WAC is the list price for a pharmaceutical sold by a manufacturer to a wholesaler (e.g., McKesson, Amerisource Bergen
[Valley Forge, PA], Cardinal Health [Dublin, OH]). WAC is
determined by the manufacturer. The WAC price published by
First DataBank, Medi-Span, and other providers of drug price
data is the price supplied to them by the manufacturer of the
pharmaceutical product. Alternate terms for WAC include: list
price (LP), catalog price, wholesale net price, book price, and
DP. Almost all single-source pharmaceuticals have WAC prices,
but many generic pharmaceuticals, repackaged pharmaceuticals, and branded generics do not have a WAC price. There
is no legal requirement for manufacturers to report WAC.4
However, certain current and evolving business practices
make it advantageous for drug manufacturers to supply WAC
prices. For instance, when WAC is used as a basis for pricing,
the absence of a WAC becomes an obstacle to reimbursement
determination and therefore a barrier to product use.
Because WAC is the basis for determining AWP for most
brand drugs, commonly using a multiplier of either 1.20 or
1.25 (1.20 after September 26, 2009), WAC is lower than
AWP and is closer to AAC. However, like AWP, WAC does not
include many discounts such as rebates, volume purchases,
and prompt payment. Unlike AWP, WAC is defined in federal
statute and as noted previously, the statutory definition of
WAC is “the manufacturer’s list price for the drug or biological
to wholesalers or direct purchasers in the United States, not
including prompt pay or other discounts, rebates or reductions
in price, for the most recent month for which the information
is available, as reported in wholesale price guides or other publications of drug or biological pricing data.”17
Assessment of WAC as a Benchmark. WAC excels when
assessed by best benchmark criteria for accessibility, administrative simplicity, and low administrative cost. WAC is closer to
AAC than AWP, and as the basis for AWP, it is more transparent.
WAC is not presently comprehensive, but the absence of WAC
prices for some NDC numbers could be overcome because (a)
currently approximately 98% of prescriptions dispensed can
be priced using WAC or MAC as the price basis; (b) payment
based on WAC would result in more widespread reporting of
WAC by manufacturers, distributors, and repackagers; and (c)
the WACs currently missing for some generic drugs can be easily managed with MAC pricing. Like AWP, WAC is not a transaction price,42 and AMPAA-NASMD argued that WAC would
be as susceptible as AWP to inflation by manufacturers if WAC
replaced AWP as the common price benchmark.16
Alabama Medicaid Filed State Plan Amendment
in 2010 to Replace AWP with Average AAC
The Alabama Medicaid Agency filed a State Plan Amendment
(SPA) with CMS and announced in May 2010 that it expected
498 Journal of Managed Care Pharmacy
JMCP
September 2010
to receive approval by mid-2010 to replace AWP in its “lower
of” pharmacy reimbursement formula with “average acquisition cost” for both brand and generic drugs.43 The state also
proposed in its SPA to increase the pharmacy dispensing fee
from $5.40 to $10.64 per prescription, based on the results of
a cost of dispensing survey that was conducted by an independent contractor. The Alabama Medicaid Agency pursued regulatory approval of the new pharmacy reimbursement formula
through the Administrative Code process, which requires a
public comment period. The announcement in May 2010 cited
an anticipated implementation date of August 2010 following
federal and state regulatory approval.
The Alabama Medicaid Agency (AMA) had motivation to
aggressively pursue discontinuation of the use of AWP because
of state court rulings regarding complaints filed by the State
against 73 drug manufacturers in 2005 for inflating drug cost
to the State through the use of AWP. Although 3 lower-court
decisions favored the State, including an award of $215 million
in February 2008,44 the Alabama Supreme Court in October
2009 overturned the lower-court rulings, reversing more than
$275 million in awards,45 and criticized the AMA for having
“actual knowledge of what the State now seeks to disavow, that
is, that published AWPs were not net prices,” since “1992 at
the very latest.” 46 The Alabama Medicaid Commissioner Carol
Steckel said as part of the announcement in May 2010 that, “As
AWP has been found to be inflated in both state and national
litigation, our Agency must move away from fraudulent AWP
pricing and toward reimbursement logic based on true estimated acquisition costs as mandated in federal guidelines.” 43
The details in the 8-to-1 ruling by the State of Alabama
Supreme Court judges may have implications for other claimants who allege perpetration of fraud by pharmaceutical manufacturers in the use of AWP. Specifically, the Supreme Court
judges found that the State’s own pharmacy reimbursement
formula, which paid pharmacies the lower of WAC plus 9.2%
or AWP minus 10.2%, was evidence that the State knew that
AWP was not a “net price” as required by federal regulation
in reimbursement of pharmacies based on EAC. The judges
wrote: “The State concedes that ‘EAC is not a ‘list’ price or an
‘undiscounted price,’ but is a price paid.’ … Remarkably, the
State has taken the position that AWP also means ‘an actual
average price’ paid.” 46 The judges stated in their concluding statement that the AMA’s “own surveys put the AMA on
notice that the AWP benchmark was not a true representation of the prices actually paid by pharmacies in Alabama for
drugs purchased from pharmaceutical wholesalers. The AMA’s
reimbursement formula, which deducted 10% from the AWP,
graphically codifies the AMA’s understanding that the AWP
was not a true representation of the price paid by pharmacies
in Alabama. ...The evidence is undisputed that the WAC was
the primary basis for reimbursement by the AMA.” 46
Vol. 16, No. 7
www.amcp.org
What Is the Price Benchmark to Replace Average Wholesale Price (AWP)?
Is a Replacement for AWP Necessary?
Although the AMPAA-NASMD work group concluded in
November 2009 that “immediate action is necessary” because
there was less than 2 years available before the “disappearance
of AWP,” some PBMs and payers in the private sector apparently
determined at the time that AWP may continue to be available
in the foreseeable future. The crystal ball for these PBMs and
payers who foresaw life after death for AWP was verified by 3
announcements of intention to continue publishing AWP that
occurred in succession in April (by Thomson Reuters for Red
Book), in May (by Gold Standard), and in June 2010 (by MediSpan). The only uncertainty that remained just 15 months after
the announcements by Medi-Span and First DataBank of voluntary discontinuation of AWP was if or when First DataBank
would announce that it too will continue to provide AWP to its
customers past September 2011.
Action by the State of Alabama to replace AWP was a
milestone in the 40-year history of the use of AWP in reimbursement of pharmaceuticals in the United States. Ironically,
AWP was originally developed in 1969 not by pharmaceutical
manufacturers but rather by the State of California for pricing
and reimbursement of pharmaceuticals dispensed by community pharmacies to Medi-Cal recipients.32 The history of AWP
is also notable in the present search for a replacement because
AWP was not intended to represent actual transaction prices
but instead was created in part to represent average prices in
the instances in which pharmaceutical manufacturers did not
report actual prices.32
So, is a replacement for AWP necessary? The currently obvious answer is no, at least not in the short term. However, the
energy that was created in the period from 2006 through the
first half of 2010 will probably continue to propel discussion of
alternate benchmark prices to replace AWP. There is demand
from some payers for more transparent benchmark prices that
better represent real-world business transactions. Some payers
would like to move to a payment method that offers little if any
gross margin on the drug product for the pharmacy provider,
combined with a dispensing fee that more closely approximates average actual dispensing cost. However, in addition to
its other shortcomings, cost-based pricing such as AAC fails
to provide a strong incentive for competitive buying. WAC on
the other hand is already used by at least 11 states for at least
some components of Medicaid reimbursement to pharmacy
providers, and some private payers already use WAC-based
reimbursement; it seems likely that more payers will adopt
WAC and abandon AWP. Furthermore, WAC is the benchmark
price from which AWP is derived, for those products for which
the manufacturer does not supply an SWP.
AWP has proven to be a type of Phoenix, perhaps not living 1,000 years as in the legend but longer than 40 years.
www.amcp.org
Authors
FREDERIC R. CURTISS, PhD, RPh, CEBS, is Editor-in-Chief, and
KATHLEEN A. FAIRMAN, MA, is Associate Editor and Senior
Methodology Reviewer of the Journal of Managed Care Pharmacy.
PHILLIP LETTRICH, RPh, is Director of Professional Relations,
Emdeon, Twinsburg, Ohio.
AUTHOR CORRESPONDENCE: Frederic R. Curtiss, PhD, RPh,
CEBS, Academy of Managed Care Pharmacy, 100 North Pitt St.,
Suite 400, Alexandria, VA 22314. Tel.: 830.935.4319; E-mail:
[email protected]
DISCLOSURES
Curtiss and Fairman report no financial or other conflicts of interest related
to the subject of this article. Lettrich is an employee of Emdeon, a provider of
revenue and payment cycle services that integrate and automate business and
administrative functions for payers, providers, and patients. Emdeon services
include pharmacy claims processing. Curtiss and Lettrich participated in the
3 meetings of the National Council on Prescription Drug Programs (NCPDP)
Focus Group on AWP Replacement in January and March 2010, and the
NCPDP Special Committee on AWP Replacement in May 2010. This manuscript does not represent policy or position statements from either NCPDP or
the Academy of Managed Care Pharmacy (AMCP), publisher of the Journal of
Managed Care Pharmacy.
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What Is the Price Benchmark to Replace Average Wholesale Price (AWP)?
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Editors’ note to online readers: All JMCP articles contain hyperlinks to the source documents for
free-access references. These hyperlinks are embedded in the reference numbers cited in the text
as well as in the list of references at the end of each article.
www.amcp.org
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