Pharmacy Invoices Show Flaws in Drug Pricing Benchmarks

A new Office of Inspector General (OIG) report provides pretty compelling evidence that pharmaceutical reimbursement models need to change. 

In Review of Drug Costs to Medicaid Pharmacies and Their Relation to Benchmark Prices, OIG compared three drug pricing benchmarks—Average Wholesale Price (AWP), Wholesale Acquisition Cost (WAC), and Average Manufacturer Price (AMP)—to pharmacy invoice prices for Medicaid-reimbursed drugs.

So, are the benchmarks consistently related to pharmacy invoice costs? Nope, especially for generics. Here’s what OIG found:

• From single-source drugs, the benchmarks were reasonably correlated to pharmacy invoice costs. 
• For multi-source (generic) drugs, all three benchmarks were extremely poor proxies of pharmacy invoice cost.
• Pharmacies receive mega-discounts vs. benchmarks on these drugs. (See my summary chart below.). 
• The AMP benchmark had the least consistent relationship to invoice prices for both single-source and multi-source drugs. 

 The OIG’s analysis didn’t include off-invoice discounts or rebates, so it can’t tell us much about underlying pharmacy margins. But the negative results for AWP/WAC/AMP make alternate methods (hello, average acquisition cost!) look more reasonable.

THE DATA

OIG conducted the study to “provide information that States can use as they consider changes to their reimbursement methodologies” in the Medicaid program. Of course, the commercial market is paying close attention. See Coming Soon: Average Acquisition Costs for Pharmacies.

OIG collected invoice data from a stratified sample of 120 pharmacies (Urban/Rural, Independent/Chain). Each pharmacy submitted a single invoice from each supply source in November 2010. OIG ended up with about 20,000 invoice prices in the following four categories:

• Single-source drugs
• Multiple-source brand-name drugs without Federal Upper Limits
• Multiple-source generic drugs without Federal Upper Limits
• Multiple-source drugs with Federal Upper Limits 

 A very important limitation of these data: OIG did NOT collect any data on any discounts, rebates, or other price incentives not reflected in the invoice prices. These off-invoice amounts are greatest for multiple-source drugs, which may partially explain the lack of correlation between invoice prices and the benchmarks.

BIG DISCOUNTS

Appendix B shows invoice price as percentage of each benchmark. Here’s my summary for AWP and AMP. Click the chart to enlarge. 

Some observations: 

Big AWP discounts for generics. Multiple-source drugs are invoiced at significant discounts to the AWP list price, but at a significant premium to the AMP computed transactional price. As you can see, multiple-source drugs with Federal Upper Limits (FULs) average 13% of AWP. Average acquisition costs would be even lower by including rebates and off-invoice discounts. These discounts are precisely why payers use Maximum Allowable Cost (MAC) limits.

Independents were invoiced less than chains for brands. Invoice prices for single-source drugs—typically brand-name drugs—were 82.8% of AWP. Surprisingly, invoice prices for urban independent pharmacies were 81.97% of AWP, which was LESS THAN the 83.19% invoice price for urban chains. Rural independents also paid less than urban chains. Both differences were statistically significant. (See page 25 of the OIG report PDF file.)

Chains were invoiced less than independents for generics. The relationship was reversed for multiple-source drugs with FULs. Chains received invoice discounts that were much larger than the discounts received by independents. The difference is also statistically significant. Rebate policies may explain some of this gap, but it’s probably due primarily to the buying power of the biggest chains vs. wholesalers.

INVOICES VS. BENCHMARKS

Both AWP and WAC were consistently related to pharmacy invoice prices for single-source drugs. These results are consistent with discount structures in the channel and wholesaler pricing approaches with pharmacies. The AMP results were less consistent, but still showed a rough relationship. 

This makes sense because manufacturers of brand-name drugs do not generally provide discounts from the WAC list price to retail and mail-order pharmacies. Instead, these pharmacies purchase primarily from drug wholesalers for either direct-store or warehouse delivery. 

Wholesalers receive limited discounts off the WAC price from brand-name manufacturers. Buy-side transactions from pharmaceutical manufacturers, including fee-for-service agreements and prompt payment terms, are the primary sources of a pharmaceutical drug wholesaler’s gross profit from brand-name drugs. Exhibit 18 in the 2011-12 Economic Report on Pharmaceutical Wholesalers and Specialty Distributors provides Pembroke Consulting’s estimates for the underlying buy-side and sell-side gross margins for core drug distribution at the Big Three wholesalers in 2011.

For multiple source drugs, the relationship between a pharmacy’s invoice price and the corresponding benchmark prices was inconsistent. For example, the relationship between invoice prices and AMPs for multiple-source drugs without FULs ranged from 5% to 8,350% percent of the related AMPs. OIG doesn’t present the results for multiple-source drugs with an FUL, but the frequency distribution in Appendix E suggests a weak relationship between invoice prices and AMPs.

WHAT’S NEXT?

OIG has identified a number of drug pricing topics in its 2012 workplan, so there will be more revelations to come in the next year.

In the meantime, expect the National Average Drug Acquisition Cost (NADAC) survey to get even more attention when it rolls out…next year?