Overview of Drug Overview of Drug Purchasing & PricingPurchasing & Pricing

Lanny T. CrossLanny T. Cross

ADAP Program SpecialistADAP Program Specialist

Drug Pricing Schedule Drug Pricing Schedule Hypothetical Drug = $100.00 AWP PriceHypothetical Drug = $100.00 AWP Price

Dispensing Fee (e.g., $3.50)

Pharmacy Discount Rate

AWP

WACAMP

Best Price

340B (PHS)

$103.50

$100

$88

$80$79

$70

$67

Drug Terms – 1Drug Terms – 1• Dispensing FeeDispensing Fee: The charge for the professional : The charge for the professional

services provided by the pharmacist.services provided by the pharmacist.

• Average Wholesale Price (AWP):Average Wholesale Price (AWP): A national A national average of prices charged by wholesalers to average of prices charged by wholesalers to pharmacies, calculated by pricing services.pharmacies, calculated by pricing services.

• Pharmacy Discount PricePharmacy Discount Price: The price paid to the : The price paid to the Pharmacy by a program (i.e., ADAP, Medicaid) for Pharmacy by a program (i.e., ADAP, Medicaid) for drugs.drugs.

• Wholesale Acquisition Cost (WAC)Wholesale Acquisition Cost (WAC): Sometimes : Sometimes

called “List Price”. WAC is the price set by called “List Price”. WAC is the price set by manufacturers. manufacturers.

Drug Terms – 2Drug Terms – 2• Average Manufacturer Price (AMP)Average Manufacturer Price (AMP): The average : The average

price paid to a manufacturer by wholesalers for price paid to a manufacturer by wholesalers for drugs distributed to retail pharmacies. A confidential drugs distributed to retail pharmacies. A confidential price.price.

• Best PriceBest Price: The lowest price paid to a manufacturer : The lowest price paid to a manufacturer for a brand name drug, taking into account rebates, for a brand name drug, taking into account rebates, chargebacks, discounts or other pricing adjustments.chargebacks, discounts or other pricing adjustments.

• 340B (PHS) Price340B (PHS) Price: The maximum price that : The maximum price that manufacturers can charge covered entities manufacturers can charge covered entities participating in the Public Health Service’s 340B participating in the Public Health Service’s 340B drug discount program. drug discount program.

• Wholesaler DiscountWholesaler Discount: Discount offered by : Discount offered by wholesalers to direct purchasers for large volume wholesalers to direct purchasers for large volume and prompt payment.and prompt payment.

Drug Terms - 3Drug Terms - 3

• Federal Upper Limit Price (FUL):Federal Upper Limit Price (FUL): Federally Federally established maximum price for a drug product if there established maximum price for a drug product if there are three (or more) generic versions of the product are three (or more) generic versions of the product rated therapeutically equivalent (A-rated) and at least rated therapeutically equivalent (A-rated) and at least three suppliers.three suppliers.

• Acquisition Cost (AC):Acquisition Cost (AC): The net cost of a drug paid by The net cost of a drug paid by a pharmacy and includes discounts, rebates, a pharmacy and includes discounts, rebates, chargebacks and other adjustments.chargebacks and other adjustments.

• ADAP Supplemental Discount/Rebate: ADAP Supplemental Discount/Rebate: An An additional discount for direct purchase states or rebate additional discount for direct purchase states or rebate for pharmacy network states, negotiated with individual for pharmacy network states, negotiated with individual drug manufacturers by the ADAP Crisis Task Force. drug manufacturers by the ADAP Crisis Task Force.

Unit Rebate Amount Unit Rebate Amount (URA)(URA)• The rebate amount paid by a The rebate amount paid by a

manufacturer to ADAP/Medicaid for each manufacturer to ADAP/Medicaid for each unit (e.g., capsule) by NDC of drug. unit (e.g., capsule) by NDC of drug.

• URA is calculated quarterly by Centers for URA is calculated quarterly by Centers for Medicare & Medicaid Services based on Medicare & Medicaid Services based on data submitted by the drug companies. data submitted by the drug companies.

• The 340B Price is calculated by subtracting The 340B Price is calculated by subtracting the URA from AMP.the URA from AMP.

URA CalculationURA Calculation

• Minimum of 15.1% of AMPMinimum of 15.1% of AMPOROR

• Difference between AMP and Best Price, if larger Difference between AMP and Best Price, if larger (Best Price adjustment)(Best Price adjustment)

PLUSPLUS

• Additional rebate if AMP price increases exceed Additional rebate if AMP price increases exceed inflation rate of the Consumer Price (Urban) Index. inflation rate of the Consumer Price (Urban) Index. Inflation calculated back to initial introduction of Inflation calculated back to initial introduction of the drugthe drug

Brand Name DrugsBrand Name Drugs

Generic DrugsGeneric Drugs

• 11% of AMP11% of AMP

Pharmacy Network Pharmacy Network Distribution System ModelDistribution System Model• Program reimburses a broad network of pharmacies Program reimburses a broad network of pharmacies

for dispensing drugs to patientsfor dispensing drugs to patients

• Model used by Medicaid, private insurance Model used by Medicaid, private insurance companies and 50% of ADAPscompanies and 50% of ADAPs

• Cost = Pharmacy Discount Rate + Dispensing Fee – Cost = Pharmacy Discount Rate + Dispensing Fee – RebateRebate

• Reimbursement rates may be multi-tieredReimbursement rates may be multi-tieredExample: Lowest of:Example: Lowest of: 1) Brand Name Drugs = AWP-12% + $3.50 (Dispensing 1) Brand Name Drugs = AWP-12% + $3.50 (Dispensing Fee)Fee) 2) Multi-source Drugs = FUL price + $4.50 (Dispensing 2) Multi-source Drugs = FUL price + $4.50 (Dispensing Fee)Fee) 3) Acquisition Cost = 340B price paid by hospital/clinic + 3) Acquisition Cost = 340B price paid by hospital/clinic +

Dispensing FeeDispensing Fee (no rebate with #3)(no rebate with #3)

Pharmacy Network Costs Pharmacy Network Costs Example = $100. AWP Drug Example = $100. AWP Drug

Dispensing Fee ($3.50)

Pharmacy Discount ($12.00)

Pharmacy cost/profit ($5.00)

Wholesaler cost/profit ($4.00)

Manufacturer cost/profit ($52.85)

Minimum 15.1% rebate ($11.93)

Best Price adjustment ($2.37)

CPI adjustment ($3.95)

ADAP Supplemental rebate ($7.90)

ADAP Net Cost = $65.35 (DF + Pharmacy + Wholesaler + Manufacturer)

Direct Purchase ModelDirect Purchase Model

• Program purchases drugs directly from Program purchases drugs directly from wholesaler at 340B (PHS) pricing schedule.wholesaler at 340B (PHS) pricing schedule.

• Model used by public hospitals, community Model used by public hospitals, community health centers and 50% of ADAPs.health centers and 50% of ADAPs.

• Cost = 340B price + Distribution System Cost = 340B price + Distribution System Costs.Costs.

• Distribution System Costs are variable based Distribution System Costs are variable based on approach, size and existing infrastructure.on approach, size and existing infrastructure.

Direct Purchase Distribution Direct Purchase Distribution System Cost may include:System Cost may include:Central PharmacyCentral Pharmacy

• Central pharmacy costs (staffing, storage, loss due to Central pharmacy costs (staffing, storage, loss due to expiration).expiration).

• Shipping (and losses).Shipping (and losses).

• Local distribution sites (pharmacy operating costs, Local distribution sites (pharmacy operating costs, dispensing fees, and drugs not dispensed).dispensing fees, and drugs not dispensed).

Mail OrderMail Order

• Profit, central pharmacy cost and shipping, but no Profit, central pharmacy cost and shipping, but no local site distribution costs.local site distribution costs.

Direct Purchase Model IssuesDirect Purchase Model Issues

• Cost to program may be reduced if distribution costs Cost to program may be reduced if distribution costs are spread out across existing health care are spread out across existing health care infrastructure.infrastructure.

• Limited distribution sites (patient transportation).Limited distribution sites (patient transportation).Alternative: retail pharmacies = shipping & dispensing Alternative: retail pharmacies = shipping & dispensing costs.costs.

• Potential delays in filling (shipping time).Potential delays in filling (shipping time). Alternative: inventory replacement = pharmacy Alternative: inventory replacement = pharmacy

cooperation.cooperation.

• Mail Order Mail Order - confidentiality and stable housing issues.- confidentiality and stable housing issues.- save on shipping with 90 day supply.- save on shipping with 90 day supply.- 90 days supply = waste with regimen changes.- 90 days supply = waste with regimen changes.

Direct Purchase Costs Direct Purchase Costs Example = $100. AWP Drug Example = $100. AWP Drug

Manufacturer cost/profit ($52.85)

Minimum 15.1% discount ($11.93)

Best Price adjustment ($2.37)

CPI adjustment ($3.95)

ADAP Supplemental rebate ($7.90)

ADAP Net Cost = Manufacturer + Distribution & Dispensing

340 B Price ($60.75)

AMP Price ($79.00)

AWP Price ($100.00)

Distribution and Dispensing Costs ($??.??)

Wholesaler Discount ($1.59)

Hybrid Purchasing ModelHybrid Purchasing Model• Program contracts with a 340B entity to purchase Program contracts with a 340B entity to purchase

medications at 340B (PHS) pricing schedule.medications at 340B (PHS) pricing schedule.

• Model employed by several ADAPs (i.e., KY, UT) utilizing the Model employed by several ADAPs (i.e., KY, UT) utilizing the pharmacy infrastructure of a hospital. pharmacy infrastructure of a hospital.

• 340B entity purchases all drugs (ADAP’s & hospital’s) at 340B entity purchases all drugs (ADAP’s & hospital’s) at 340B price and does not maintain separate inventories. 340B price and does not maintain separate inventories.

• Hospital provides detailed reports of drugs dispensed to Hospital provides detailed reports of drugs dispensed to ADAP – which allows filing for ADAP supplemental rebates. ADAP – which allows filing for ADAP supplemental rebates.

• Cost = 340B price + Distribution System Costs - Rebates.Cost = 340B price + Distribution System Costs - Rebates.

• Distribution System Costs may be billed as a dispensing fee Distribution System Costs may be billed as a dispensing fee and/or hospital costs (e.g., pharmacy staff, shipping).and/or hospital costs (e.g., pharmacy staff, shipping).

Hybrid Purchase Costs Hybrid Purchase Costs Example = $100. AWP Drug Example = $100. AWP Drug

340 B Entity Purchase Price ($60.75)

Minimum 15.1% discount ($11.93)

Best Price adjustment ($2.37)

CPI adjustment ($3.95)

ADAP Supplemental rebate ($7.90)

ADAP Net Cost = 340B Price + Distribution & Dispensing - Rebate

340 B Price

AMP Price ($79.00)

AWP Price ($100.00)

Distribution and Dispensing Costs ($??.??)

GenericsGenerics• The cost of generic drugs may be significantly higher for The cost of generic drugs may be significantly higher for

rebate states than direct purchase states. rebate states than direct purchase states.

• The AMP of generics may be a much lower percentage of The AMP of generics may be a much lower percentage of AWP than brand name drugs.AWP than brand name drugs.

• This results in a very large profit margin to the This results in a very large profit margin to the pharmacy/wholesaler (spread between pharmacy pharmacy/wholesaler (spread between pharmacy discount rate and AMP), and a smaller rebate (11% of a discount rate and AMP), and a smaller rebate (11% of a smaller AMP). smaller AMP).

• If there are multiple manufacturers of a generic, then a If there are multiple manufacturers of a generic, then a Federal Upper Limit (FUL) price is established which may Federal Upper Limit (FUL) price is established which may reduce the reimbursement rate to pharmacies.reduce the reimbursement rate to pharmacies.

Direct Purchase Costs Direct Purchase Costs Generic Example = $90. AWP Drug Generic Example = $90. AWP Drug

Manufacturer cost/profit ($40.05)

Minimum 11.1% discount ($4.95)

ADAP Net Cost = Manufacturer + Distribution & Dispensing

340 B Price ($40.05)

AMP Price ($45.00)

AWP Price ($90.00)

Distribution and Dispensing Costs ($??.??)

Pharmacy Network Costs Pharmacy Network Costs Generic Example = $90. AWP Drug Generic Example = $90. AWP Drug

Dispensing Fee ($4.50)

Pharmacy Discount ($10.80)

Wholesaler/Pharmacy cost/profit ($34.20)

Manufacturer cost/profit ($40.05)

Minimum 11% rebate ($4.95)

ADAP Net Cost = $78.75 (DF + Pharmacy + Wholesaler + Manufacturer)

Estimated Prices For Selected Public Purchasers, as Percent AWPEstimated Prices For Selected Public Purchasers, as Percent AWPvon Oehsenvon Oehsen; ; Pharmaceutical Discounts Under Federal Law: Pharmaceutical Discounts Under Federal Law:

State Program OpportunitiesState Program Opportunities

Stephen Schondelmeyer, PRIME Institute, University of Minnesota (2001)

100.0%

80.0%

67.9%

60.5%

51.7%

49.0%

47.9%

34.6%

0% 20% 40% 60% 80% 100%

AWP

AMP

Medicaid (Min.)

Medicaid Net

FSS

340B

FCP

VA Contract

Private Sector Pricing

Getting the correct price Getting the correct price Problems/Suggestions:Problems/Suggestions:

Too many drugs to monitor.Too many drugs to monitor.• Identify your highest expenditure NDCs.Identify your highest expenditure NDCs.

Wholesalers and the wrong pricing schedule.Wholesalers and the wrong pricing schedule.• Partner with another direct purchase state (different Partner with another direct purchase state (different

wholesaler) and compare prices quarterly.wholesaler) and compare prices quarterly.• Make sure that drug manufacturers know who is your Make sure that drug manufacturers know who is your

wholesaler for notification of ADAP pricing.wholesaler for notification of ADAP pricing.

Confidential pricing – AMP, PHS, URA, etc.Confidential pricing – AMP, PHS, URA, etc. • Ask your wholesaler for a 340B pricing list - ADAP price Ask your wholesaler for a 340B pricing list - ADAP price

should be better due to supplemental agreements.should be better due to supplemental agreements.• Office of Pharmacy Affairs will compare your price (rebate) Office of Pharmacy Affairs will compare your price (rebate)

to 340B price (URA) for a small number of NDCs.to 340B price (URA) for a small number of NDCs.• Prime Vendor Program has established a secure website for Prime Vendor Program has established a secure website for

members that provides the 340B prices of a limited members that provides the 340B prices of a limited (currently) number of manufacturers.(currently) number of manufacturers.

Getting the correct price - 2Getting the correct price - 2

Complex calculations with “secret” numbers Complex calculations with “secret” numbers to arrive at to arrive at correct price.correct price.

• Focus instead on quarterly price/rebate changes on Focus instead on quarterly price/rebate changes on priority NDCs.priority NDCs.

• Direct price/rebates shouldn’t change radically due to Direct price/rebates shouldn’t change radically due to CPI protection.CPI protection.

Can’t keep track of all of the ADAP Crisis Task Can’t keep track of all of the ADAP Crisis Task Force agreements.Force agreements.

• NASTAD sends e-mails and mails hard copy to AIDS NASTAD sends e-mails and mails hard copy to AIDS Directors/ADAP Coordinators when new agreements Directors/ADAP Coordinators when new agreements are reached or existing agreements are changed.are reached or existing agreements are changed.

• Contact Lanny Cross (Contact Lanny Cross (ltc02@health.state.ny.usltc02@health.state.ny.us) with ) with questions.questions.

Future Pricing IssuesFuture Pricing IssuesDeficit Reduction Act (2006) – still being contested• Lowers FUL pricing for generics (250% of AMP)• Eliminates manufacturers ability to exclude certain prices from the Best

Price calculation.• AMP pricing becomes publicly available July 2007.

Proposed - FY2007 Budget• Further decrease in FUL price (150% of AMP)• Eliminates Best Price component from Medicaid rebate calculation - ??

Effect on 340B pricing ??• Office of Pricing Affairs receives new funding to improve monitoring of

and access to 340B pricing.

Proposed - Healthy America Act (S. 4)• Allows 340B entities to use multiple contract pharmacies• Increased auditing of and access to 340B pricing.

Average Sales Price Average Sales Price (ASP)(ASP)• Average Sales Price (ASP):Average Sales Price (ASP): A new system created by A new system created by

federal and state government prosecutors in federal and state government prosecutors in settlements with pharmaceutical manufacturers to settlements with pharmaceutical manufacturers to ensure more accurate price reporting. ensure more accurate price reporting.

• ASP is the weighted average of all non-federal sales to ASP is the weighted average of all non-federal sales to wholesalers and is net of chargebacks, discounts, wholesalers and is net of chargebacks, discounts, rebates, and other benefits tied to the purchase of the rebates, and other benefits tied to the purchase of the drug product, whether it is paid to the wholesaler or the drug product, whether it is paid to the wholesaler or the retailer. retailer.

• Medicare began basing payments for drugs covered Medicare began basing payments for drugs covered under Part B on average sales price (ASP) on January 1, under Part B on average sales price (ASP) on January 1, 2005.2005.

ASP - IssuesASP - Issues

Positives:Positives:• As a public price it would allow ADAPs to track As a public price it would allow ADAPs to track

and verify pricing more easily.and verify pricing more easily.• Less potential for price manipulation.Less potential for price manipulation.• Should reduce cost of generics for rebate states.Should reduce cost of generics for rebate states.

Concerns:Concerns:• No minimum rebate/discount for 340B entities. No minimum rebate/discount for 340B entities. • Removes the current safeguard that holds 340B Removes the current safeguard that holds 340B

price increases to the rate of inflation.price increases to the rate of inflation.