GHDP 105-17: Pricing Considerations for Drugs Covered Under Pharmacy Benefit Programs Flashcards
Scope
- Prescription drug pricing for outpatient prescription drugs typically covered through a pharmacy benefit program in US
- Typically oral medications that are self-administered by consumers
- Specialty drugs requiring special distribution (e.g. injection at doctor’s office) are not covered in this paper
Rx Distribution Channel
1. Manufacturers
a. Produce drugs
b. Typically distribute them through drug wholesalers
c. Can also sell directly to pharmacies and hospitals
Manufacturers sell based on Avg. Manufacturer Price (AMP)
d. Can also get wholesale acquisition cost (WAC) as a suggested list price for sale to wholesalers
e. There is no consistent relationship between AMP and WAC
2. Wholesalers
a. Middlemen between manufacturers and retailers
b. Allow retailers to purchase from 1 source rather than negotiating with hundreds of manufacturers
c. Purchase drugs on either an AMP or WAC basis
d. Wholesalers price their drugs on “WAC plus a markup” or a “discount off average wholesale price (AWP)” basis
e. WAC and AWP are the most common benchmark pricing resources
- These prices are published and maintained in the Red book and Medi-Span
- There are no requirements that AWP reflect the price of actual sales
- WAC = 83.33% of the AWP; relationship can vary for generic drugs
3. Retailers (Pharmacies)
a. Dispense prescription drugs to consumers
b. Price paid by retailers for drugs from wholesalers is the actual acquisition cost (AAC)
c. No consistent relationship between AAC and AWP or AMP
d. When pharmacies buy directly from manufacturers, AAC = AMP
e. Retailers sell to consumers at a usual & customary (U&C) price
- Includes AAC plus the pharmacy’s markup
f. Retailer will negotiate pricing with the insurer or the insurer’s PBM
4. Consumers
a. If there is no insurance, consumer pay U&C or cash price
b. If insurance is involved, consumers pay a copayment or coinsurance
- Retailer will bill the PBM or insurer for the remaining cost
5. Where do PBMs and Insurers fit in?
a. PBMs are the third part administrators of drug benefits
- Handle admin tasks related to adjudication and management of drug benefits
- Can handle pricing negotiations, customer reporting, and consulting services
- May provide mail service facilities to provide in-home prescription drug service
b. Insurers provide medical and drug coverage to consumers
- Can partner with a PBM or provider these services on their own
c. Insurers and PBMs are not considered participants in channel of distribution, b/c they are not involved in actual distribution
- Exception is when PBMs own mail service. Then they are considered retailers
d. Insurers and PBMs negotiate with retailers to sell drugs to consumers on a discount off AWP or on a max allowable cost (MAC) basis
- MAC is typically used for generic drugs
6. Manufacturers’ Rebates
a. Rebates are paid well after the consumer has received the drug
b They are incentive payments paid by manufacturers for including their drug in the pharmacy benefit plan
c. Rebates are typically on brand drugs as a percent of WAC
d. Very few rebate arrangements with generic drugs
Pricing Relationships
- Generic drugs are usually less expensive than the equivalent brand product
- Relationship between AWP and WAC is constant for every drug (WAC = 83.33% AWP) due to legislation in the US
- Example: 30-day brand script, 2 pills/day, non-insured, using table above
a. Manufacturer: receive AMP ($46.80)
b. Wholesaler: pay $46.80, receive AAC ($50)
c. Retailer: Pay $50, receive U&C ($75)
d. Cash consumer: Pay $75 - Example: 30-day brand script, 2 pills/day, insured, using numbers above
a. Manufacturer: receive AMP ($46.80)
b. Wholesaler: pay $46.80, receive AAC ($50)
c. Retailer: Pay $50, receive negotiated price ($52)
d. Insured consumer: Pay $25 copay + insurer pays $27
Benefit Plan Pricing
- Important for insurers to understand their pricing arrangements with PBMs and retailers
- Often hidden fees and drug inclusions that change the resulting price
- Actuary must reflect pricing differences in expected claim costs and premium rates
- In addition to core drug costs (called ingredient costs) off AWP, PBMs and retailers may charge a dispensing fee per drug dispensed (i.e. drug script)
- PBMs may also charge an admin fee per script to cover customer service, claim processing, and other admin
- Once total costs are developed, actuary can substract copays and other member cost sharing to develop a premium rate
- Cost sharing often differs for generic and brand drugs, and for brand drugs on and off the plan’s preferred formulary list (a.k.a. preferred vs. non-preferred drugs)
Prescription Drug Pricing Considerations in Canada
- Drug distribution channel is similar in Canada, but there are differences in pricing
- US AMP is called Manufacturer’s list price (MLP) in Canada
- MLP is subject to review by government agency called Patented Medicine Prices Review Board (PMPRB)
- Board ensures that prices are reasonable and in line with alternative treatment - In Canada, prices for generics are limited by provincial governments, and capped at a percent of the brand price
- In US, federal and state government are not involved in prices - In Canada, provincial governments or large plan sponsors may negotiate directly with manufacturers for rebates to have drug listed on its formulary
- Generic drug rebates (aka professional allowances) are negotiated between manufacturers and retailers - Pricing provisions between insurers, PBMs, and retailers differ in the US vs Canda
a. In US common to negotiate pricing off the AWP (e.g. AWP - 15% for brands)
b. In Canada, insurer set maximum costs for branads based on a markup over MLP or actual acquisition cost (the amount the retailer pays for the drug)
- Generics are capped at a percent of their corresponding brand’s price
- Fee schedules show max the insurer will reimburse for each unit of drug
- This makes drug pricing more straightforward in Canda, but schedules can be quite large
