Transcript Hewitt AWP Drug Pricing Presentation 1007

Addressing the Need for Change
PBM Pricing Methodologies
The Uncertain Future of AWP
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Introductions
• Hewitt’s Pricing Methodology Forum Team
Joshua Golden
Kristin Begley, PharmD
Jane Lyons
Vickie Loranca
DAT Team: Bill Hahn, Litong Sun, Young Lee
October 2007
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Forum Objectives
• To discuss Hewitt’s initial recommendations for a future
pharmacy benefit pricing methodology, incorporating input from
all key stakeholders,
• To determine the final proposed format/methodology as it
pertains to future pharmacy financial RFP and contracting
activity for Hewitt clients, and
• To identify the potential for broader industry acceptance of
the new proposed methodology.
October 2007
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Historical Background
• 1960s – Average Wholesale Price (AWP) originally developed by State of CA
Medicaid program to standardize pharmacy reimbursements
Typically represented ~ 20% markup from Wholesale Acquisition Cost (WAC)
• 1980s – Adopted more broadly by the managed care industry
• 1990s – First DataBank (owned by Hearst Corp.) evolved as industry-leading
provider of AWP data
• 2002 through 2004 – First Databank revises AWP for most drugs, shifting to a
WAC + 25% markup from manufacturer pricing
• 2004 – lawsuit brought against First DataBank over calculation methodology
• 2005 – First DataBank ceases surveys, freezes AWP markup at WAC + 25% for
most drugs
• 2006 and Beyond – Settlement reached, First DataBank agrees to change AWP
calculation methodology and to cease publication of AWP after 2 years under
certain conditions
October 2007
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The Current Challenge
• AWP continues to be utilized by several key players in the
pharmacy benefit industry:
Contracts between plan sponsors and PBMs
Contracts between PBMs and retail pharmacies
• Transition to a fixed-percentage spread between WAC and
AWP may complicate contractual arrangements
• Eventual phase-out of AWP necessitates a replacement
benchmark metric for standardized pricing in the industry
• The pharmacy benefits industry has not as of yet presented a
coordinated solution
October 2007
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The Current Challenge
To serve our clients in
the future, Hewitt will
require a stable and
reliable pricing
methodology for PBM
contracting.
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The Current Challenge
Hewitt seeks a
standardized pricing
approach for the following:
• Solicitation and comparative
analysis of PBM pricing
proposals for clients
• Implementation of financial
contractual guarantees
• Benchmarking/auditing of
financial contractual
guarantees
October 2007
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The Current Challenge
The preferred methodology should meet the following criteria:
 Standardized at the national level
 Updated with sufficient frequency
 Widely available (either in the public domain or commercially)
 Good potential for longevity
 Widely accepted by the vendor community
 Applicable for generic/brand drugs and retail/mail channels
 Provides good coverage for all NDCs (no data “gaps”)
 Not susceptible to high variability in measuring generic prices
October 2007
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Pricing Terms & Definitions
List of common pricing acronyms:
• AWP – Average Wholesale Price
• AAC – Actual Acquisition Cost
• ABP – Alternative Benchmark Price
• AMP – Average Manufacturer Price
• ASP – Average Sales Price
• DP – Direct Price
• FUL – Federal Upper Limit
• MAC – Maximum Allowable Cost
• MRA – Maximum Reimbursable Amount
• NWP – Net Wholesale Price
• SWP – Suggested Wholesale Price
• WAC – Wholesale Acquisition Cost
October 2007
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Pricing Terms & Definitions – AWP
Average Wholesale Price
• Nationally-tracked pricing index that currently serves as the basis of several key
relationships in the pharmacy industry
• Also referred to as Blue Book AWP (BBAWP) by First DataBank
• Was purported to be based on surveys of multiple wholesalers in the past, but now
is calculated using a straight multiplier of WAC (for most brand drugs)
• Has been called “a vestige of a drug-distribution system that disappeared in the
early 1980s.” (Medical Marketing Economics)
Considerations:
• Now tied directly to WAC price for many NDCs
• Not reflective of actual pricing dynamics in the marketplace
• May be phased out within the next couple years
October 2007
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Pricing Terms & Definitions – AAC
Actual Acquisition Cost
• The true “transactional” cost of acquisition for a specific buying entity
• Closest representation to the true cost of a drug, including discounts, buying
incentives, rebates, etc.
Considerations:
• Varies considerably by buying entity
• Typically considered proprietary data, not publicly available
• Not viable as a nationally standardized benchmark
October 2007
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Pricing Terms & Definitions – ABP
Alternative Benchmark Price
• Published by First DataBank beginning in March 2005 as an alternative benchmark
to AWP.
• Based on manufacturer’s WAC (or if WAC is not available, the Direct Price)
WAC/DP + 25% for prescription drugs
• ABP is not reported for any drug that does not have either a WAC or DP
Considerations
• Tied directly to WAC, very similar to the new AWP calculation
• Not available for all NDCs (for instance, those that lack a WAC/DP)
October 2007
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Pricing Terms & Definitions – ASP
Average Sales Price
• Transactional index calculated by CMS, based on manufacturer-supplied data
• Weighted average price, based on actual transactions
• Intended for use with reimbursements for Medicare Part B drugs that are
administered in physicians’ offices.
Considerations:
• Only reported quarterly by manufacturers, so private sector application is not
appropriate.
• Lag time for data to be made publicly available is typically 6-12 months
• Aggregated and “blended” across purchaser types (health care providers, retailers,
wholesalers), making it less relevant to one particular class of trade
October 2007
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Pricing Terms & Definitions – DP
Direct (Non-Wholesaler) Price
• Reported by manufacturers
• Represents the price at which the manufacturer sells the drugs to non-wholesalers
• Does not necessarily represent the actual acquisition price by the non-wholesaler,
as discounts, rebates, and other price reductions/incentives may apply.
Considerations:
• May be provided by manufacturer in addition to (or in lieu of) WAC price
• Generally not available where WAC price is not provided
October 2007
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Pricing Terms & Definitions – FUL
Federal Upper Limit Price
• Price list used by CMS in calculating reimbursements under the Medicaid program
• Also referred to as the CMS Maximum Allowable Cost (MAC) List or the HCFA
MAC List
• Set independently by the federal government and by individual states
• Calculated as a straight-line multiple (150%) of the published price of the lowestcost therapy in a group of therapeutically equivalent drugs
• Only assigned when multiple generic equivalents are available (2 or more)
Considerations:
• Not available for all NDCs (focuses on multi-source products), so not viable as a
single-benchmark solution for brands and generics
• Variations by state may prevent standardization
• Data collection process is inconsistent, and timeliness issues exist with submission
October 2007
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Pricing Terms & Definitions – MAC/MRA
Maximum Allowable Cost
• Developed independently by PBMs, health plans, and other providers.
• Also referred to as Maximum Reimbursable Amount (MRA)
• Represents a unit price for a generic drug, and is applied consistently to all versions
of the same generic.
• Developed to deal with variations in pricing from one generic distributor to another
Considerations:
• Generally used only for generic drugs
• May vary widely by provider in terms of breadth (inclusion of generic NDCs) and
depth (unit price)
• Can be modified by providers with little or no plan sponsor oversight
October 2007
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Pricing Terms & Definitions – SWP
Suggested Wholesale Price
• Reported by manufacturers, it is the suggested price that a wholesaler might
charge customers (i.e. retail pharmacies, hospitals, etc.)
• Developed to deal with variations in pricing from one generic distributor to another
• Currently published by First DataBank and other data providers
Considerations:
• SWP is merely a suggested price – the actual price charged by a wholesaler is
determined by that wholesaler
• Not always made available for all drugs
• Arbitrarily set by manufacturers using proprietary methodology, and thus not a
reliable metric for standardized pricing
October 2007
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Pricing Terms & Definitions – AMP
Average Manufacturer Price
• Reported by manufacturers
• Average price that a manufacturer sells a drug directly to retail pharmacies.
• Intended for use with Medicaid reimbursements
Considerations:
• Public availability is limited, with only quarterly internet postings planned
• AMP data involves a lag of months, making it inappropriate for tracking drug prices
in the private sector
• Faces harsh criticism by the retail pharmacy industry, with accusations that the
metric underestimates actual acquisition costs (and may thus threaten profit
margins for the retailers)
October 2007
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Pricing Terms & Definitions – WAC
Wholesale Acquisition Cost
• Reported by manufacturers, it is the catalog or “list” price for a drug product being
distributed to wholesalers
• Also referred to as Net Wholesale Price (NWP) by First DataBank
• Available in the private sector through data providers (FDB, MediSpan)
• Does not represent the actual transactional price at the wholesaler level (these
transactions may include discounts, rebates, or other pricing incentives)
Considerations:
• WAC is not published for all drugs – many NDCs (particularly older generics) do not
have a reported WAC price. Some estimate this to be 20% of generic NDCs.
• May vary widely for a specific generic drug by generic manufacturer/distributor
• Set by manufacturers, and not audited across manufacturers by any regulated
oversight process
October 2007
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Pricing Terms & Definitions – Summing It All Up…
Type of
Benchmark
Publicly
Available?
Frequency
of Update
NDC
Coverage
AWP
List
Yes
~Monthly
Excellent
AAC
Transactional
No
Varies
Excellent
ABP
List
Yes
~Monthly
Mediocre
AMP
Transactional
Yes
~Quarterly
Excellent
ASP
Transactional
Yes
~Quarterly
Good
DP
List
Yes
~Monthly
Mediocre
FUL
List
Yes
Varies
Poor
MAC/MRA
List
No
Varies
Varies
SWP
List
Yes
~Monthly
Mediocre
WAC
List
Yes
~Monthly
Mediocre
Benchmark
October 2007
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WAC – A Closer Look
Advantages:
• While not a transactional index, it is a better representation of true
acquisition cost when compared to AWP
“WAC has historically been the closest reported price to
the actual transaction price for pharmaceuticals between
the manufacturer and wholesalers or other large direct
purchasers, given the lack of public data on actual
transaction prices.” (Bank of America Equity Research
Report, December 2006)
• Updates occur frequently
• Benchmark is readily available via multiple data providers
October 2007
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Evaluating WAC Against Our Criteria
The preferred methodology should meet the following criteria:
 Standardized at the national level
 Updated with sufficient frequency
 Widely available (in the public domain or commercially)
 Good potential for longevity
 Widely accepted by the vendor community
 Applicable for generic/brand drugs and retail/mail channels
X Provides good coverage for all NDCs (no data “gaps”)
X Not susceptible to high variability in measuring generic prices
October 2007
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WAC – NDC Coverage Issues
Percent of Claims With No NDDF WAC Available
(Retail & Mail Combined)
10.0%
9.0%
8.0%
7.0%
6.0%
5.0%
4.0%
3.0%
2.0%
1.0%
0.0%
9.1%
4.1%
0.5%
SS Brand
October 2007
MS Brand
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Generic
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WAC – NDC Coverage Issues
Percent of Claims With No NDDF WAC Available
18.0%
16.0%
14.0%
12.0%
10.0%
8.0%
6.0%
4.0%
2.0%
0.0%
15.6%
Retail
Mail
7.6%
4.8%
0.7%
GEN
October 2007
MSB
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0.6%
0.1%
SSB
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WAC – Generic WAC Price Variability Issues
From “Medicaid and Medicare Drug Pricing” White Paper1:
• “The relationship between list prices (AWP and WAC) is much less
predictable for generic drugs than it is for brand name drugs…
Even more volatile is the relationship between the list prices (AWP
or WAC) and actual acquisition cost for generics.”
• “Generic firms often discount their actual net price to the pharmacy
to compete with other generics, but they do not always reflect
these discounts in lower AWP or WAC list prices.”
• “Generic prices are also relatively volatile, because the market
for generic drugs is effectively a commodity market.”
1
“Medicare and Medicaid Drug Pricing – Strategy to Determine Market Prices”, S. Schondelmeyer,
ABT Associates, August 2004.
October 2007
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WAC – Addressing the Issues
Possible approaches to address WAC data issues:
• Exclude NDCs with missing WAC data from pricing
proposals/contracts
• Use alternate pricing benchmark (AWP, DP, AMP, etc.) to fill gaps
• Use generic “reference WAC” (average, median, or other calculation
based on all other similar generics) to fill gaps
• Use predecessor brand WAC to fill gaps
• Use alternate pricing benchmark for ALL generics
• Use generic reference WAC for ALL generics
• Use predecessor brand WAC for ALL generics
October 2007
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WAC – Addressing the Issues
Excluding non-WAC NDCs
 Easiest of the approaches to implement
 Exclusion is not desirable, allows room for pricing ambiguity
 Providers (mail centers, pharmacies) will have incentive to
inventory/dispense non-WAC products
 Providers could modify use of specific NDCs to increase non-WAC
dispensing rates
 Does not solve issue of generic WAC variability
October 2007
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WAC – Addressing the Issues
Using Alternative Pricing Benchmark
 Fairly easy to implement
 Several benchmarks available to choose from
 Multiple benchmarks add complexity
 Increased challenges for audit and accountability
 Potential for game-play by selectively dispensing certain NDCs
to increase/decrease non-WAC dispensing rates
 Most relevant alternative benchmark (AWP) likely to be phased
out
 May not solve issue of generic WAC variability
October 2007
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WAC – Addressing the Issues
Using “Reference WAC”
 Could be applied across ALL generics to calculate a single WAC
for each GCN
 Would use average, median, min/max, or other reference
calculation
 May be difficult to standardize calculation methodology across
entities
 Frequency of update for calculations may be a concern, especially
with new-to-market generics
 May not work for generics with one or two suppliers (SSGs lack
comparative data to calculate Reference WAC)
 Complicated calculations required, with increased challenges for
audit and accountability
October 2007
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WAC – Addressing the Issues
Using “Predecessor Brand” WAC
 Offers a high success rate for populating missing WAC data
 Could be applied across ALL generics to calculate a single WAC
for each GCN
 Could easily be applied across ALL generics
•
Stabilizes the high variability of generic WAC pricing across
similar generics
•
Encourages purchasing patterns based on lowest cost per
unit, instead of focus on optimizing spread
 Allows for use of single benchmark across delivery channels and
drug types
 May be challenging to standardize calculation methodology
October 2007
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Hewitt’s Recommended Methodology
Utilize Predecessor Brand WAC for ALL Generic NDCs
1. Identify ALL generic NDCs
2. Identify Formulation ID group for each NDC
3. Cross-reference against other NDCs in Formulation ID group to
identify the best-matched brand NDC, accounting for package size
4. Assign best-matched brand WAC to the generic NDC
October 2007
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Hewitt’s Recommended Methodology
1. Identify ALL generic NDCs using a standardized identifier process

Process must rely on data readily available from the major
data providers (FDB, MediSpan)

Process must be standardized

Use of Generic Product Indicator (GPI) and/or Generic Indicator
(GI) codes to properly identify generic status
October 2007
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Hewitt’s Recommended Methodology
2. Identify Formulation ID group for each claim

Clinical Formulation ID (GCN_SEQNO) Code in FDB

Formulation ID (GCN) Code in FDB

Groups drugs according to “generic ingredient(s), drug
strength(s), and route of administration, and dosage form”
October 2007
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Hewitt’s Recommended Methodology
3. Cross-reference against other NDCs in Formulation ID group to
identify the best-matched brand NDC

Must account for package size of claim

May involve multiple iterations or “sweeps” of the data

Link-up process must be standardized across entities
October 2007
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Hewitt’s Recommended Methodology
4. Assign best-matched brand WAC to the generic NDC

Predecessor Brand WAC utilized for generic NDC, regardless
of availability of generic WAC

Final methodology must address situations where no brand
match can be found (i.e. where brand has been removed from
the market)
– Exclude from guarantee?
– Use the generic’s own WAC?
– Use standardized AWP formula?
October 2007
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Hewitt’s Recommended Methodology - Challenges
• Accounting for Package Size
in predecessor brand lookup
• Dealing with brands that
have no WAC price
• Dealing with GCNs that have
no predecessor brand
• Maintaining consistency in
determining brand/generic
status
October 2007
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AMP – Future Outlook
Advantages of AMP
• AMP is a transactional index (instead of a list price)
More accurately reflects actual market dynamics
May contribute to continual downward price pressure on
drug prices
• Recent changes to AMP methodology may improve the metric

More timely data (monthly submissions)

More accurate data (standardization of calculation)

More availability (public distribution)

Some questions remain on timing for implementing changes
October 2007
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AMP – Future Outlook
Industry Criticisms of AMP
• AMP underestimates acquisition costs
May threaten profit margins of retailers
• AMP data is inherently outdated
Retrospective data requires review of historical time periods,
and is released with a “lag”
Current lag is up to 5 months
Lag to be reduced with recent methodology changes by CMS
• AMP lacks transparency, and is not widely available

October 2007
Issue may be resolved with CMS ruling
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AMP – Future Outlook
Industry Criticisms of AMP
• AMP inappropriately includes prompt-pay discounts
Incentives should be retained by the purchaser
Inclusion in AMP will discourage the incentives
• AMP discourages generic dispensing
Margins would be higher on higher cost drugs
Could be resolved by applying higher differential or higher
dispensing fee for generics
• AMP will result in a large increase in dispensing fees

October 2007
Is this bad?
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AMP – Future Outlook
Industry Criticisms of AMP
• “Final CMS Medicaid
Reimbursement Rule Shows
Reckless Disregard for
Patient Welfare by
Threatening Viability of
Independent Community
Pharmacies” (NCPA)
• “CMS Assaults
Neighborhood Pharmacies
With New Rule Cutting
Reimbursements For
Generic Medicaid Drugs.”
(ACPCN)
October 2007
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