Two fairly recent laws and a pending out-of-court settlement will have an effect on how much the government and health plans pay for drugs. The current pricing model is a Rubik's cube of jargon and formulas that artificially inflate costs. Based on so-called average wholesale price, it results in pricing condemned by health plans as arbitrary and excessive.
Drugs move from manufacturer to mouth through wholesalers and pharmacists, and everyone gets a cut. Manufacturers play the biggest role in determining price, but the wholesalers — who purchase drugs in bulk and distribute them to pharmacists — affect final pricing. In paying for brand name drugs, wholesalers generally use AWP (average wholesale price, although some wags insist it means "ain't what's paid").
AWP has never been defined by statute, but it is used by plans and pharmacy benefit managers as the retail list or sticker price for most drugs and as the basis for reimbursement. AWP is widely criticized as not reflecting true market price because it is easily manipulated by wholesalers. The Kaiser Family Foundation details this in a report titled "Follow the Pill."
The emerging model's features are blurry — at least for now — but experts say that once the pieces fall into place, changes will improve clarity and provide greater equity in drug pricing. That's the good news.
The bad news is that health plans are anticipating a daunting adjustment. Two laws — the Medicare Prescription Drug, Improvement and Modernization Act of 2003 (MMA) and Deficit Reduction Act of 2005 (DRA) — have nearly killed the AWP model, and a lawsuit against First DataBank, which publishes AWP, apparently has finished the job.
"We are anticipating imminent changes in pharmaceutical pricing and reimbursement methodologies, and we're all trying to get out on the front edge," says Tim Sawyers, RPh, MBA, director of clinical pharmacy services for the insurer HealthSpring, and editorial board member of this magazine. He said his plan is working to "understand who the stakeholders will be, what system of price determination each of the players will use."
For example, HealthSpring currently participates in Medicare Part D. The company relies on actuarials to determine competitive pricing in the Centers for Medicare & Medicaid Services Part D bid process. The move away from an AWP model will have costly and complicated consequences, says Sawyers. It may require the use of average sales data, a pricing methodology that relies on manufacturers' sales data to set the Medicare payment amount for a particular drug. Plans will have to gather and analyze those data.
"Many pharmacy organizations have formed task forces to evaluate alternatives in preparation for the conversion to another methodology of pharmacy claims processing," he says. "There will be an industry-wide adjustment to whatever the government finally does."
The new system will probably be an improvement. Charges of AWP manipulation led to a 2005 civil lawsuit against First Databank and McKesson, which controls close to 40 percent of the wholesale drug market.
The suit was based on antitrust concerns. It alleged that McKesson colluded with FDB to use pricing ambiguity to inflate prices artificially. Several labor unions charged that McKesson and First DataBank conspired to raise prescription drug prices, with an associated unfair cost of about $7 billion to health plans, private insurers, and state Medicaid offices between 2001 and 2005.
In December, the unions and the plaintiffs reached a settlement that is now being reviewed by a federal district court in Massachusetts. "The settlement is supposed to alleviate much of the current ambiguity in the system," says Tim Kosty, PharmD, president of Pharmacy Healthcare Solutions (PHSI), a consulting company in Pittsburgh.
FDB maintains that it derived its AWP prices by surveying drug wholesalers and manufacturers. AWP is so widely used by wholesalers and retailers as a starting point for setting prescription prices that many purchase lists of the prices from FDB. According to Jeff Hawes, PharmD, a pharmacy benefit consultant for Pharmaceutical Strategies, PBMs frequently use FDB's published AWP list as a benchmark to negotiate drug discounts with pharmacies.
"The recent legal action against FDB may very well be the long-needed impetus to drive appropriate industry changes," says Hawes.
$4 billion in savings
In the proposed settlement, the FDB agreed to scale back the benchmark prices that it publishes. The deal could save consumers more than $4 billion next year alone, according to an analysis by plaintiffs.
The death of AWP actually began about four years ago, when Congress passed the Medicare Prescription Drug Improvement and Modernization Act of 2003 (MMA). In addition to creating Part D, the MMA made adjustments in the way that Medicare pays for many items and services.
"Largely in response to longstanding fraud and abuse concerns related to the AWP pricing methodology, the MMA replaced the AWP methodology with a new pricing scheme based primarily on average sales price," says Diane Ung, a health care lawyer and partner in Foley & Lardner.
The ASP system went into effect Jan. 1, 2005, and Ung says that it has had "a significant impact on pharmaceutical manufacturers, physicians, and suppliers involved in the distribution of covered medications," particularly Part B payments for medications administered in physicians' offices and not available through pharmacies, such as most cancer drugs.
ASP methodology relies on manufacturers' sales data to set the Medicare payment amount for a particular drug. MMA requires pharmaceutical manufacturers to report ASP pricing data to the Centers for Medicare & Medicaid Services (CMS) on a quarterly basis. A significant effect MMA has on general drug pricing is that it makes ASP pricing publicly accessible.
Part D pricing will be primarily affected by the Deficit Reduction Act Under that law, Congress made significant changes to pharmaceutical pricing, Medicaid price rebates, and Medicaid payments to pharmacies. Federal officials predict that the new policies can save $8.4 billion over the next five years.
One reason is that it makes average manufacturer price (AMP), which is used to determine Medicaid rebates, accessible to the public. Previously, AMP was known only to government officials. What's more, the law lowers AMP on many prescription drugs, putting manufacturers under increased cost pressure and increasing Medicaid rebates to states. It also reduces Medicaid payments to pharmacies and eliminates the use of AWP from the Medicaid payment system.
CMS recently published rules for implementing DRA pricing policies. Final rules are expected in June 2007. The law requires significant changes to how manufacturers calculate AMP and what is known as Medicaid best price (BP), which reduces the effectiveness of many pricing concessions used by manufacturers. These include:
- Exclusion of prompt-payment discounts to wholesalers,
- Exclusion of fewer nominal price arrangements from BP calculation,
- Inclusion of what are known as "authorized generics" in calculation of AMP and BP. These are generic drugs manufactured by or under contract to brand name manufacturers, and
- Exclusion of drug sales to children's hospitals from BP calculation.
Drug manufacturers were to have begun monthly reporting of AMP in January, and AMP on all drugs will be publicly posted on CMS's Web site starting Spring 2007. Past reporting was confidential.
Significant change coming
"Though there are several competitors for the next generation of pharmacy pricing benchmarks, there does not appear to be a clear drug-pricing alternative that will solve all of the problems," says Hawes.
But at the least, all the current changes — MMA, DRA, and the problems faced by FDB — mean that plans must get ready for significant change, says Kosty. "Plans want an equitable system," he says. "It's not known what impact all this will have, but we do hope it will be an improvement."