SN105 - Pricing Drugs Covered Under Pharmacy Program

Question 1

Components of the Rx distribution channel

Part 1 of 3

Answer 1

1. Manufacturers
2. Wholesalers
3. Retailers
4. Consumers
   
   4. 1 if there is no insurance, consumer pays U&C or cash price
   5. 2 If ins. Is involved, consumers pays a copay or Coinsurance
5. PBMs and Insurers
   
   5. 1 PBMs are third party admin of drug benefits
      
      5. 1.1 Handle admin tasks related to adjudication and management, pricing negotiations, customer reporting, and mail service
   6. 2 Insurers provide medical and drug coverage to consumers
   7. 3 Insurers and PBMs negotiate with retailers to sell to consumers on a discount off AWP or on a max allowable cost (MAC) basis
      
      5. 3.1 MAC is used for generic drug
6. Manufacturers rebates
   
   6. 1 incentives by manufacturers for including their drug in the pharmacy plan
   7. 2 Rebates are typically on brand drugs as a percent of WAC
   8. 3 Very few rebate arrangements with generic drugs

Question 2

Components of the Rx distribution channel
Part 2 of 3
Manufacturers and Wholesalers

Answer 2

1. Manufacturers
   
   1. 1 Produce drugs
   2. 2 Typically distribute through drug wholesalers
   3. 3 Can also sell directly to pharmacies and hospitals
   4. 4 Manufacturers sell based on avg manufacturer price (AMP)
   5. 5 Set wholesale acq cost (WAC), a suggested price for sale to wholesalers
   6. 6 there is no consistent relationship between AMP and WAC
2. Wholesalers
   
   2. 1 Middlemen between manufacturers and retailers
   3. 2 Allow retailers to purchase from 1 source
   4. 3 Purchase drug on either an AMP or WAC basis
   5. 4 price on a WAC plus a markup or a discount off average wholesale price (AWP) basis
   6. 5 WAC and AWP are the most common benchmark pricing resources
   7. 6 WAC = 80% of the AWP due to legislation in US

Question 3

Components of the Rx distribution channel
Part 3 of 3
Retailers (pharmacies)

Answer 3

1. Dispense prescription drugs to consumers
2. Retailers pay wholesalers the actual acquisition cost (AAC)
3. No consistent relationship between WAC and AWP or WAC
4. When pharmacies buy directly from manufacturers, AAC=AMP
5. Retailers sell to consumers at a usual & customary (U&C) price
6. Retailer will negotiate pricing with the insurer or the insurers PBM

Question 4

Pharmacy benefit plan pricing considerations

Answer 4

1. Often hidden fees and drug inclusion or exclusions that change the resulting price
2. Actuary must reflect pricing differences in expected claim costs and premiums
3. In addition to core drug costs (aka ingredient costs), PBMs and retailers may charge a dispensing fee per script
4. PBMs may also charge an admin fee per script
5. Actuary subtracts member cost sharing from total costs to develop a premium rate
6. Cost sharing differs for generic and brand drugs, and for brand drugs on and off the plans preferred formulary list

Question 5

Pricing prescription drugs

Differences between us and Canada

Answer 5

1. Drug distribution channel is similar in Canada, but there are differences in pricing
2. U.S. AMP is called manufacturer’s list price (MLP) in Canada
3. MLP is subject to review by government agency called patented medicine prices review board (PMPRB)
4. In Canada, prices for generics are limited by provincial govts. And called at a percentage of the brand price
5. 1 in US, federal and state government are not involved in prices
6. In Canada, provincial govts for large plan sponsors may negotiate directly with manufacturers for rebates to have drug listed on its formulary
7. Pricing provisions between insurers, PBMs and retailers differ in the US vs Canada
   
   6. 1 In US common to negotiate pricing off the AWP
   7. 2 In Canada, insurers set maximum costs for brands based on a markup over MLP or actual acquisition cost (the amount the retailer pays for the drug)