As addressed by VCHI fellow Amelia earlier this year, Virginia’s recent election of governor Ralph Northam has opened the doors for heightened political attention to healthcare issues, especially due to his background as a healthcare provider. Recently, he has passed House Bill 572 – a bill designed to open up the actual costs behind prescription costs and pharmacy billing, allowing patients to receive more affordable prescription options. I’m sure most of us can agree that prescription medication costs have always been an enigma; the passage of this bill will potentially provide clarity towards these costs and provide methods to access cheaper alternatives in a timely fashion.
Although not completely relevant, it would help to know how a retail pharmacy obtains its drugs to sell. A pharmaceutical company manufactures a medication for high cholesterol and will sell the drug to wholesalers. The wholesaler will pay manufacturers for their manufactured drugs—usually at a discounted rate because of the volume they are purchasing. This value, the price including discounts and rebates, is known as the Average Manufacturing Price (AMP). AMP is the price that manufacturers report to the Medicaid drug rebate program and is only reported monthly and quarterly. Alternatively, a value known as the Wholesale Acquisition Cost (WAC) exists, which is the manufacturer’s list price for a drug to wholesalers without including the discounts or rebates. Between AMP and WAC, WAC is the only price type defined in regulations.
The next transaction takes place between the wholesaler and the retail pharmacy. The average wholesale price (AWP) is a measurement of the price paid by the pharmacy to purchase drug products from the wholesaler. This value is compiled on different databases such as Medi-Span and First DataBank. In the absence of a reported AWP, it is calculated by multiplying the WAC by 1.2 or 1.25. As a result, AWP has long been argued as being inaccurate and unreliable, subject to manipulation and not representative of the actual purchase price for pharmaceuticals.1 In fact, an investigation by the Department of Health and Human Services in 1997 found that there is a significant difference (8%) between actual pharmacy acquisition cost and AWP.2 There is a continuous search currently for a new alternative benchmark to AWP due to its downfalls, but one has yet to be established.
Once the pharmacy has purchased the drugs, the final step is the purchase of the medication by the patient. The Usual and Customary (U&C) reflects the price of the drug to the consumer without the use of insurance.3 This is often referred to as the “cash price” for patients.
As you can tell, the market of prescription drug purchase is a convoluted, acronym-ridden system with both flaws and strengths. The behind-the-scenes of drug purchasing by pharmacies is complex and ever-changing, so what is valid today may not and probably will not be standard 5 years from now.
Now that we have established the bare-bones of the prescription drug purchasing, we can introduce third-party payers. In general, a third-party payer is any organization, public or private, that pays or insures health or medical expenses. In this case, the third-party payer is the patient’s prescription insurance. In the realm of prescription drug coverage, a majority of prescription insurances utilize a separate pharmacy benefits manager (PBM) to manage the patient’s purchase of drugs from pharmacies. When a patient purchases a prescription drug from their pharmacy, they usually pay a smaller portion of the transaction and the PBM reimburses the pharmacy for the rest. For pharmacies, pricing of medications for insured patients is determined by their contracts with each PBM. A value known as the maximum allowable cost (MAC) for drug products is set by both states and PBMs in order to control their own spending on prescription drugs.4 This means that if it costs more for a pharmacy to dispense a medication than they are reimbursed, they operate at a loss when selling the drug to the patient. Some third-party contracts include a variable dispensing fee which is added to the patient’s co-pay in order to help the pharmacy’s expenses. All of these factors influence how much a patient pays for their prescription.
An additional, and maybe most impactful factor to the actual price patients pay for a prescription is the formulary designed by the insurance company. A formulary is essentially a list of all the medications the insurance will cover and at what price the patient will pay per prescription. This is often divided into different tiers containing different medications. Each plan works differently, covers different medications, and has different medications in different tiers, so it is important to learn how each patient’s health insurance works regarding prescription coverage. The fact that there is such variance in prescription drug coverage further complicates the issue of how much each patient will pay at the pharmacy counter.
Back to House Bill 572, the exact pertinent wording is stated as follows:
“B. Any contract between a carrier and its intermediary regarding the provision of pharmacy services by participating pharmacy providers and any provider contract between a carrier and a participating pharmacy provider or its contracting agent shall contain specific provisions that prohibit the carrier or intermediary from restricting a participating pharmacy provider’s disclosure of any relevant information to an individual purchasing a prescribed drug, including the cost to the provider of the prescribed drug, actual reimbursement to the provider for the prescribed drug, efficacy of the prescribed drug, and the availability of a therapeutically equivalent drug that is less expensive for the patient than the prescribed drug.”
Essentially any contractor, third-party payer, PBM that restricts a participating pharmacy from disclosing any relevant information to the purchasing of a prescribed drug (cost to the pharmacy, actual reimbursement to the pharmacy, efficacy of the prescribed drug, and availability of a therapeutically equivalent drug that is less expensive for the patient), is no longer allowed to do so. When a patient arrives at a pharmacy and is expected to pay an outrageous amount for their prescription, this legislation prompts for the investigation of alternatives, perhaps cheaper with at least equivalent efficacy. While this is not directly addressing any of the steps prior to purchase of the prescription by the patient, it nonetheless is beneficial and perhaps a first step towards transparency by PBMs and third-party payers.
There is no doubt that this measure, if implemented correctly, will improve healthcare for patients throughout Virginia. As we previously learned, each insurance plan and PBM vary in which medications are preferred and which medications are outrageously expensive. This tool will ensure that patients are receiving the most cost-effective medication, essentially improving high value health care. If you’re interested in more information, you can access the bill directly here or check out these news articles that address this as well!
- Curtiss F, Lettrich P, Fairman K. What is the price benchmark to replace average wholesale price (AWP)? J Manag Care Pharm. 2010;16(7):492-501.
- Department of Health and Human Services, Office of Inspector General. Medicaid pharmacy – actual acquisition cost of prescription drug products for brand name drugs. OIG report no. A-06-96-00030. April 1997. Available at: http://oig.hhs.gov/oas/reports/region6/69600030.pdf. Accessed July 27, 2010.
- Gencarelli DM. One pill, many prices: variation in prescription drug prices in selected government programs. NHPF issue brief / National Health Policy Forum, George Washington University. 2005(807):1-20.