What Is the Price Benchmark to Replace Average Wholesale ...

Frederic R. Curtiss

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CONTEMPORARY SUBJECT
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
n article on the front page of the Wall Street Journal modifications to all products that had a WAC markup greater
on October 6, 2006, thrust into the public media the than 1.20. This decision expanded the list of NDC numbers A otherwise esoteric controversy concerning the use of from the 1,442 specified in the lawsuit to well over 50,000
7average wholesale price (AWP) as the primary basis for reim- items. The expanded list included both prescription and
bursements to pharmacies for pharmaceuticals in the United nonprescription (over-the-counter [OTC]) items, both active
1States. Although used widely for nearly 40 years, AWP had and inactive NDC numbers on the drug database, as well as
been criticized prior to this investigative report as unreli- a variety of markup factors. The adjusted AWPs had markup
able, subject to manipulation, and not representative of the factors that ranged from 1.20 to 1.33. About two-thirds to
2-4actual purchase price for pharmaceuticals. The Wall Street three-fourths of the NDC numbers with adjusted AWPs had a
7Journal article, based on a tentative settlement of litigation in pre-settlement WAC markup of 1.25.
which First DataBank (San Francisco, CA) and the McKesson This U.S. District Court decision on March 30, 2009,
Corporation (San Francisco, CA) were ...

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• Linternaute.com
• Drúedain
• Pri?evac
• Estriol
• Ampoule
• Fuligny

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• Publié par: Infyo
• Nombre de lectures: 107
• Langue: English

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C O N T E M P O R A R Y S U B J E C T

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

n article on the front page of theWall Street Journal ave A rage wholesale price (AWP) as the primary basis for reim- on October 6, 2006, thrust into the public media the otherwise esoteric controversy concerning the use of bursements to pharmacies for pharmaceuticals in the United 1 States. Although used widely for nearly 40 years, AWP had been criticized prior to this investigative report as unreli- able, subject to manipulation, and not representative of the 2-4 actual purchase price for pharmaceuticals. TheWall 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 unilater- ally 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 1 cost (WAC) to a common multiplier of 1.25, effectively increas- ing 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, sub- 5 sidiary of Wolters Kluwer Health). On March 30, 2009, Judge Saris signed a final order and judgment certifying the class (of “Private Payor” purchasers) which settled 2 national class 6 action lawsuits against the 2 largest publishers of AWP. 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 6 that were listed in the court complaint. 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

modifications toallproducts 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 7 items. 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 7 pre-settlement WAC markup of 1.25. 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 imple- 8 mented.” Medi-Span announced that it would discontinue publication of “current AWPs for all products in the Medi- 9 Span files within approximately 2 years of March 30, 2009.” Therefore, according to these announcements by the 2 largest and most widely used publishers of drug price data, the vol- untary 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., phar- macy 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 mar- ket share,Gold Standard(Elsevier, Atlanta, GA) andRed Book, did not make announcements in 2009 that they would discon- tinue publication of AWP. On April 8, 2010, Thomson Reuters (New York, NY), the publisher of theRed Book, announced that it would continue to provide AWP in addition to other drug price information including WAC, DP, suggested retail 10 price (SRP), and federal upper limit (FUL). Similarly, on May 18, 2010, Gold Standard announced that it too would con- tinue 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 Description – Example 1. Readjust the AWP reduced by the rollback to the former If the former multiplier was 1.25 X WAC, the new reduced AWP is recalculated by multiplier (i.e., creating a “legacy” AWP). using the pre September 26, 2009 ratio (e.g., 1.25 divided by 1.20). 2. Recontract with pharmacy providers using a new (lower) If the former discount for brand drugs was 84% of AWP (i.e., AWP – 16%), then the AWP discount. new discount might be 87.5% of AWP (AWP – 12.5%). 3. Recontract with pharmacy providers using a new price WAC is used as the new price benchmark. If the former AWP discount was 16%, the benchmark. new contract rate might be WAC + 5%. 4. Recontract with pharmacy providers using combination WAC and AWP are used as the price benchmarks with the new AWP discount (equivalent) price benchmarks. (e.g., AWP – 12.5% = WAC + 5%). 5. Do nothing or some other strategy. AWP = average wholesale price; WAC = wholesale acquisition cost.

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 11 new benchmarks…” 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 indus- try or governmental organizations develop a viable, generally 12 accepted alternative price benchmark to replace AWP.” This announcement of course left First DataBank in a difficult posi- tion as the only current publisher of AWP on record as plan- ning 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 forallNDC numbers for which the WAC or DP multiplier was greater than 1.20. For the NDC numbers where 13 the former multiplier was 1.25, the AWP reduction was 4%, derived from dividing the 5-point reduction by the former mul- tiplier 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 pay- ers 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

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 bench- mark (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 pay- ers has not been assessed and reported, understandably since the actions represent business decisions made in a competi- tive 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 14 ensure that our networks remain stable.” 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 15 reimbursement methodology as a result of this ruling.” 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 Lipitor 20 mg tablet Unit AWP AWP at Quantity = 90 AWP Minus 16% AWP Minus 12.5% Pre 09.26.2009 AWP $4.77144 $429.43 $360.72 Post 09.26.2009 AWP $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.

expense of the provider, (e.g., if the previous AWP-based reim- bursement 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 15 inflated.” 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 pay- ment 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 16 Association of State Medicaid Directors (NASMD). 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

Dispense Fee

$1.75 $1.75

$1.75 $1.75

Total

$362.47 $362.47

$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 16 rendered AWP ineffective.”

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 16 statute. Specifically, in the Social Security Act in the section pertaining to average sales price (ASP), WAC is defined in sub- section (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 17 or other publications of drug or biological pricing data.” 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 18 new benchmark to replace AWP.” The focus group met twice in early 2010 and again in May 2010, when it was identified as 18 an NCPDP Special Committee. 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 pre- pared the following definitions of possible alternative bench- marks 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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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 sub- traction of all discounts. AAC prices are not reported or pub- licly 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 deter- mining 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 theoreti- cally 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 phar- macies 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 19 invoices in Alabama. 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 20 of the “Alabama State MAC List.” 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 20 current reimbursement.”

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 expen- sive 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 pro- viders based on their own individual AACs. Reimbursement based on pharmacy-specific AAC would also reduce the finan- cial incentive for competitive buying because pharmacy-pur- chasers 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

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 a 4. Comprehensive AWP – average wholesale price 5. Durable (not an interim solution) EAC – estimated acquisition cost 6. Stable (won’t produce more FUL – federal upper limit litigation) MAC – maximum allowable cost b 7. Easily understood MLP – manufacturer list price c 8. Transparent and unambiguous WAC – wholesale acquisition cost 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. b MLP 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. c WAC 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 pre- scription 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 21 to the consumer.”

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 22 discounts extended to wholesalers.” 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 23 for generic drugs. 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 24 basis for reimbursement. 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 regula- tions 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 25 provided to [PBMs] for their mail order pharmacy purchases.” 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) 26 (Public Law 110-275).

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 offi- cer of each drug manufacturer must attest to its authenticity. Weaknesses of AMP include lack of timeliness, lack of avail- ability, 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 27 order pharmacies. 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 unavail- able, 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 17,28 from Medicaid “best price” and sales at “nominal charge.” 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 require- ments, chargebacks, and rebates other than those obtained 29 through the Medicaid rebate program.” 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 108- 173), and the method of calculation of ASP changed on April 1,

29 2008. 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 30 outpatient departments. 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 4 2 calendar quarters. 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 publica- tions (or drug price compendia). Two companies’ compendia (Medi-Span and First DataBank) are used as the basis of pric- ing most pharmacy claims in the United States. Two other recognized drug price data sources for drug price information including AWP areRed Book(Thomson Reuters) and Alchemy (Elsevier Gold Standard). When AWP is supplied by the manu- facturer, it is identified by the drug price compendia as sug- gested 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 12 markup of 1.20 times WAC/DP. 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 31 characters); and (c) package code (1 or 2 characters). Assessment of AWP as a Benchmark.AWP sur- Although vived for 40 years as the basis for pharmacy reimbursement of pharmaceutical ingredient cost, it was never intended to 32 represent actual transaction prices in the marketplace. AWP is favorable according to many best benchmark criteria includ- ing the higher-value attributes of timeliness, accessibility, comprehensiveness, administrative simplicity, and low admin- istrative 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 introduc- ing a “legacy” multiplier of WAC added to the complexity by creating multiple AWPs. The pejorative connotation associ- ated 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 33 publication of false and inflated average wholesale prices.” This court decision referred to AWP as “ain’t what’s paid” and “fictitious” and introduced a “speed limit” for the margins 34 between AWP and the actual purchase price. It is possible that some of the criticism of AWP could be overcome by adopt- ing an alternate name, such as “manufacturer list price,” “stan- dard 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 “rea- sonable dispensing fees” or (b) the pharmacy “providers’ usual 35 and customary charges to the general public.” Each state Medicaid agency determines EAC for pharmacy reimburse- ment, 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 36 size of drug most frequently purchased by providers.” 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 37 of brand and generic drugs, with no state MAC. As of March 2010, almost all of the remaining states and the District of Columbia used discounted AWP solely or primarily to deter- mine 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 reim- bursement 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 associ- ated with AAC including administrative complexity, expense in price data collection, and prices outdated almost immedi- ately 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

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’sApproved Drug Products 38 with Therapeutic Equivalence Evaluations Book). The  (Orange 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 24 1, 2007. CMS started sending AMP data monthly to state Medicaid programs in July 2006, as required by DRA 2005, but 39 states were not required to base reimbursement on these data. MIPPA ( July 15, 2008) delayed implementation of FULs based 40 on AMP to no earlier than October 1, 2009 and prevented CMS from making any AMP “publicly available” prior to that 26 date. However, MIPPA was superseded by the Affordable Care Act of 2010, including redefinition of FUL as 175% of AMP, and 27 redefinition of the calculation of AMP.

Assessment of FUL as a Benchmark. Although FUL prices are widely available, the products with FUL prices are not com- prehensive. FULs are intended to serve as benchmark prices for multiple-source products (generic and brand) but are not appli- cable 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 41 drugs that do not have FULs. 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 pro- competitive method for pharmacy reimbursement for multiple- source drugs.

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Wholesale Acquisition Cost (WAC) WAC is the list price for a pharmaceutical sold by a manu- facturer 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 pharmaceuti- cals, and branded generics do not have a WAC price. There 4 is no legal requirement for manufacturers to report WAC. 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 pub- 17 lications of drug or biological pricing data.”

Assessment of WAC as a Benchmark. WAC excels when assessed by best benchmark criteria for accessibility, adminis- trative 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 eas- ily managed with MAC pricing. Like AWP, WAC is not a trans- 42 action price, and AMPAA-NASMD argued that WAC would be as susceptible as AWP to inflation by manufacturers if WAC 16 replaced AWP as the common price benchmark.

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

to receive approval by mid-2010 to replace AWP in its “lower of” pharmacy reimbursement formula with “average acquisi- 43 tion cost” for both brand and generic drugs. 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 indepen- dent contractor. The Alabama Medicaid Agency pursued regu- latory 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 44 in February 2008, the Alabama Supreme Court in October 2009 overturned the lower-court rulings, reversing more than 45 $275 million in awards, 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 46 the very latest.” 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 esti- 43 mated acquisition costs as mandated in federal guidelines.” The details in the 8-to-1 ruling by the State of Alabama Supreme Court judges may have implications for other claim- ants who allege perpetration of fraud by pharmaceutical manu- facturers 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 46 average price’ paid.” The judges stated in their conclud- ing statement that the AMA’s “own surveys put the AMA on notice that the AWP benchmark was not a true representa- tion 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 46 the primary basis for reimbursement by the AMA.”

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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 forRed Book), in May (by Gold Standard), and in June 2010 (by Medi- Span). The only uncertainty that remained just 15 months after the announcements by Medi-Span and First DataBank of vol- untary 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 reim- bursement 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 commu- 32 nity pharmacies to Medi-Cal recipients. 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 32 report actual prices. So, is a replacement for AWP necessary? The currently obvi- ous 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 approxi- mates 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 liv- ing 1,000 years as in the legend but longer than 40 years.

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.: [phone]; E-mail: [e-mail]

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 manu- script does not represent policy or position statements from either NCPDP or the Academy of Managed Care Pharmacy (AMCP), publisher of theJournal of Managed Care Pharmacy.

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38. U.S. Government Accountability Office. Medicaid outpatient prescrip- tion drugs: estimated 2007 federal upper limits for reimbursement com- pared with retail pharmacy acquisition costs. Medicaid federal upper limits. Report no. GAO-07-239R. December 22, 2006. Available at: http://www.gao. gov/new.items/d07239r.pdf. Accessed July 26, 2010. 39. Department of Health and Human Services, Office of Inspector General. State’s use of new drug pricing data in the Medicaid program. Report no. OEI-03-06-00490. April 2007. Available at: http://oig.hhs.gov/oei/reports/ oei-03-06-00490.pdf. Accessed July 26, 2010. 40. Centers for Medicare & Medicaid Services. Policy and reimbursement. Federal upper limits. March 18, 2010. Available at: https://www.cms.gov/ Reimbursement/05_FederalUpperLimits.asp#TopOfPage. Accessed July 27, 2010. 41. Department of Health and Human Services, Office of Inspector General. Variation in state Medicaid drug prices. Report no. OEI-05-02-00681. September 2004. Available at: http://oig.hhs.gov/oei/reports/oei-05-02- 00681.pdf. Accessed June 7, 2010.

42. Wolters Kluwer Health. Wolters Kluwer Health average wholesale price (AWP) policy. Effective June 21, 2010. Available at: http://www.medispan. com/common/pdf/wkh_AWP_policy.pdf. Accessed July 26, 2010. 43. Alabama Medicaid Agency. AAC drug pricing, dispense fee increase pending before CMS. May 28, 2010. Available at: http://www.medic- aid.alabama.gov/documents/News/MM_Articles/MM_AAC_COD_ Update_5-28-10_FINAL.pdf. Accessed July 26, 2010. 44. Associated Press. Jury orders AstraZeneca to pay damages in suit.Wall Street J.Feb 22, 2008:B6. 45. Stevenson KL. Litigation news. Alabama Supreme Court overturns fraud verdicts against drug companies. American Bar Association. February 22, 2010. Available at: http://www.abanet.org/litigation/litigationnews/top_ stories/022210-astrazeneca-alabama-supreme-court-pharmaceutical-prices. html. Accessed July 26, 2010. 46. Supreme Court of Alabama. October Term, 2009-1010.AstraZeneca LP and AstraZeneca Pharmaceuticals LP v. State of Alabama; Smithkline Beecham Corporation v. State of Alabama; Novartis Pharmaceuticals Corporation v. State of Alabama.October 16, 2009. Available at: http://www.alabamaappellate- watch.com/uploads/file/1071439.PDF. Accessed July 26, 2010.

Editors’ note to online readers: AllJMCParticles 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.

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