Actual Acquisition Cost (AAC)
AAC is a price benchmark used by several state Medicaid programs to set drug reimbursement rates
Federal Medicaid regulations define AAC as a state Medicaid agency’s determination of a pharmacy provider’s actual prices paid to acquire drug products marketed or sold by specific manufacturers. 42 C.F.R. § 447.502, 81 Fed. Reg. 5170, 5347 (Feb. 1, 2016). It is based on periodic surveys of pharmacy invoices.
Effective April 1, 2017, all state Medicaid programs are required by CMS regulation to use AAC as a basis for Medicaid drug payment rates. States will be permitted to use the NADAC (see below), conduct their own pharmacy invoice surveys, or use other reliable actual cost data to determine AAC.
Average Manufacturer Price (AMP)
AMP is a price benchmark used by CMS to:
- Calculate rebates owed by manufacturers under the Medicaid Drug Rebate Program
- Calculate Federal Upper Limits (FULs) under Medicaid.
AMP is calculated and submitted by drug manufacturers at monthly and quarterly intervals to the Centers for Medicare & Medicaid Services (CMS).
It is defined as the average price of a drug purchased, either directly from manufacturers or through wholesalers, a by retail community pharmacies, excluding federal government sales and certain other transactions. See 42 U.S.C. § 1396r-8(k)(1) and 42 C.F.R. § 447.505.
Average Sales Price (ASP)
ASP is a price benchmark used by CMS to establish payment amounts for drugs under Medicare Part B, which covers drugs administered in the physician’s office and in the outpatient hospital department that are not usually self-administered, drugs infused through durable medical equipment used in the home; and certain other categories of drugs specified by statute.
Payment for most drugs under Medicare Part B is 106% of ASP.
ASP is defined as the total value of a manufacturer's sales to all purchasers in the United States for a drug in a calendar quarter divided by the total number of units, with exclusions for federal government sales and certain other transactions. See 42 U.S.C. § 1395w–3a(c); 42 C.F.R. § 414.804ASP is calculated and submitted by drug manufacturers quarterly to CMS.
Average Wholesale Price (AWP)
AWP is a “list” price for a drug available in drug pricing publications. It was originally intended as an estimate of the average price charged for a drug by wholesalers to pharmacies. However, as it has evolved over decades, AWP no longer represents an average of actual transactions. AWPs published by a pricing publication may be based on prices reported by the manufacturer. If the manufacturer does not report an AWP, it is calculated by the pricing publication based on the WAC reported by the manufacturer, increased by 20%.
Best Price (BP)
For drugs approved under an NDA or BLA, it is used along with AMP to calculate rebates owed by manufacturers under the Medicaid Drug Rebate Program.
BP is defined as the lowest price available from the manufacturer during a quarter to any wholesaler, retail pharmacy, provider, health maintenance organization, nonprofit entity, or governmental entity within the United States, with exclusions for federal government sales and certain other transactions. See 42 U.S.C. § 1396r–8(c)(1)(C)(i)-(ii); 42 C.F.R. §447.505
BP is calculated and submitted by drug manufacturers quarterly to CMS.
Biologic drugs are drugs that are made from a combination of organic components typically manufactured in a microorganism, such as a living cell or tissue. The combination is not easily identified or characterized, compared to the chemical structure of traditionally synthesized drugs, which is known and clearly replicable.
Biosimilar drugs are follow-on versions of biologic drugs, not manufactured by the innovator. Functional equivalence in addition to safety and efficacy must be tested and verified in order to gain FDA approval.
Brand name drug
Brand name drugs are trademark protected by the original innovating drug manufacturer. These drugs are typically granted a period of market “exclusivity,” during which they face no generic competition.
Buy and Bill
“Buy and bill” is a financial transaction in which healthcare providers purchase prescription drugs from wholesalers for administration to patients in outpatient offices or clinics. Reimbursement through the “buy and bill” transaction as outlined in Medicare Part B is 106% of ASP.
Chargebacks are payments from pharmaceutical companies to wholesalers, which are made when wholesalers sell drugs to purchasers at a lower price than they themselves pay the manufacturer for them. This most commonly occurs when manufacturers and purchasers enter into direct contracts that set a lower price than the price to the wholesaler, who is contractually obligated to sell them to the purchasers by the manufacturer.
Co-insurance is a percentage of the cost of a prescription or medical service paid by the patient (the health plan covers the remainder of the cost. Generic drugs frequently require little or no co-insurance by the patient, while specialty tier drugs may require that patients pay coinsurance of 30% (or more) of the drug’s price.
Copay coupons are supplied by manufacturers to reduce or eliminate patients’ “out of pocket” spending on the drug. This undermines the insurer’s efforts to steer utilization toward generic or lower priced medicines. The copay coupon amount generally contributes to the out-of-pocket limit in the plan agreement.
These are separate from patient assistance programs.
A co-payment is a fixed dollar amount per prescription paid by the patient (the health plan covers the remaining cost). The amount of the co-payment depends on formulary placement and varies across health plans.
Commercial health plan
A commercial health plan is an insurance policy administered by a commercial entity that reimburses for health services. (See health plan)
Health plans purchased through an employer are commercial health plans.
A deductible is a determined payment threshold, up to which the patient contributes 100% of healthcare costs. After the threshold is met, the patient enters the coverage phase, during which the health plan covers a pre-determined portion of the cost. Deductibles vary across health plans.
Discounts, typically calculated as a percentage of a drug’s price, may be offered by pharmaceutical companies or wholesalers in exchange for sales volume and prompt payment.
The donut hole is the gap in coverage in Part D plans when a patient’s cumulative annual prescription costs exceed the deductible and coinsurance limits, while not yet reaching the threshold for the catastrophic coverage.
Federal Ceiling Price (FCP)
FCP is the maximum price that a manufacturer may charge for a covered drug sold to the “Big 4” Federal agencies that procure drugs — Department of Veterans Affairs, Department of Defense, Public Health Service (including the Indian Health Service) and the Coast Guard. The FCP is calculated annually based on the NFAMP. See 38 U.S.C. § 8126 (h)(5).
Federal Upper Limit (FUL)
The FUL is the maximum amount that a state Medicaid agency may pay in the aggregate to pharmacies as reimbursement for a multiple source drug. CMS establishes an FUL where there are at least three therapeutically equivalent (A-rated) products on the market nationally. The FUL is 175 percent of the weighted average of the most recently reported monthly AMPs for the A-rated products. See 42 U.S.C. § 1396r–8(e)(5).
Formularies are ranked or tiered lists of prescription drugs that are covered by a health plan. Formularies may be managed by PBMs on behalf of health plans, or the health plans themselves. Prescription drugs are placed on formulary tiers based on clinical and pricing considerations. Formulary tiers typically carry different levels of cost sharing (e.g. copayments or coinsurance levels).
Generic drugs are chemical and biological equivalents to brand name drugs. They are released into market after the brand name product’s period of exclusivity ends.
Generic drugs go through an abbreviated new drug application (ANDA) pathway forgoing the preclinical and clinical steps. Rather, this pathway requires the applicant to scientifically demonstrate that performance equivalence with the innovator product.
Group Purchasing Organization (GPO)
Group purchasing organizations (GPOs) are third-party administrative organizations that aggregate purchasing volume across multiple healthcare providers and negotiate with pharmaceutical companies and wholesalers on providers’ behalf.
GPOs may receive discounts from manufacturers or wholesalers for volume purchases. In addition, they receive fees from provider clients for aggregating purchases and negotiating favorable pricing.
72% of purchase volume by hospitals is contracted through GPOs.
In 2016, the four largest GPOs in the US were:
Vizient - More than $100b annual spend volume, membership including more than 50% of nation’s acute care providers
Premier - More than $50b annual spend volume
HealthTrust - $30b annual spend volume
Intalere - $9b annual spend volume
Health Insurance Exchange (HIX) plan
Health insurance exchange plan is a health insurance policy participating in the government run marketplace complying with the Patient Protection and Affordable Care Act (ACA).
A health plan is an insurance policy administered by a government program or commercial entity that reimburses beneficiaries for health services, including inpatient, outpatient and prescription drugs.
Health plan coverage is paid for by the patient according to plan agreements in the form of monthly premiums and additional payment methods:
Deductible – costs are paid out of pocket until the deductible limit. (see deductible)
Copay/coinsurance – costs are shared between the patient and insurer until the out of pocket limit
Inpatient care is hospital care for patients admitted overnight.
For Medicare beneficiaries, this is covered under Medicare Part A.
Maximum Allowable Cost (MAC)
MAC is an optional state Medicaid program that sets the maximum amount that a state Medicaid agency or commercial plan will pay for generic drugs and brand name drugs that have generic equivalents. Some MACs are based on FULs, but there is no standardization in the industry as to the criteria for the inclusion of drugs on MAC lists or for the methodology as to how the MAC is determined, changed or updated.
The medical benefit provides insurance coverage for drugs administered by intravenous infusion or injection in a clinic or other outpatient setting.
Medicare is a federal social insurance program that provides health insurance for patients over the age of 65 and patients with certain disabilities. Medicare is funded through payroll and income taxes, as well as beneficiary contributions (deductible, co-insurance and premiums) which vary by Part.
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Medicare is the single largest healthcare payer and the second largest drug payer.
National Average Drug Acquisition Cost (NADAC)
NADAC is the average acquisition cost for a covered outpatient drug purchased by retail community pharmacies, based on invoice purchase prices from independent and chain retail community pharmacies collected through a national survey of retail pharmacies. It is published and updated monthly by CMS. States may, but are not required to, use the NADAC as a basis for determining AAC.
Non-Federal Average Manufacturer Price (NFAMP)
NFAMP is the weighted average price paid for a drug by U.S. wholesalers, excluding sales to the federal government and certain other transactions. See 38 U.S.C. § 8126(h)(5).
NFAMP is calculated and submitted by drug manufacturers annually and quarterly to the Department of Veterans Affairs (VA). The annual NFAMP is used to calculate the Federal Ceiling Price (FCP) for each calendar year.
Outpatient care, also known as ambulatory care, is health care delivered in a clinic, doctor’s office or hospital that does not require an overnight stay.
For Medicare beneficiaries, this is covered under Part B.
A payer is a public or private entity that provides health insurance to patients, covering healthcare services and products. For prescription drugs, the payer generally reimburses the pharmacy or provider for the majority of the medication’s price, with the patient responsible for the balance through a co-payment or co-insurance. After the negotiated price has been reimbursed to the pharmacy or provider, the payer often receives a substantial rebate from the manufacturer.
Of the US population that is insured, the 2016 payer mix is as follows:
- Employer 49%
- Medicaid 19%
- Medicare 14%
- Non group 7%
- Other public (VA, military) 2%
A pharmaceutical company develops, produces and markets prescription drugs. Their activities include research and development as well as sales and marketing, also known as “commercialization”.
The pharmacy benefit provides insurance coverage for drugs dispensed to patients by pharmacies.
Drugs are dispensed to patients at the pharmacy who pay out of pocket amount and a claim is filed to payer for reimbursement.
Pharmacy Benefit Manager (PBM)
Pharmacy Benefit Managers are third party organizations that aim to reduce pharmacy and administrative costs for health plans (payers) by 1) managing formularies and 2) negotiating drug rebates and discounts. Some large PBMs also manage their own mail order pharmacies.
In 2016, the three largest PBMs in the US managed prescription coverage for 78% of patients.
For high cost specialty drugs, insurance companies may require prior authorization in order to provide coverage. This utilization management strategy ensures that providers or patients meet certain conditions before a product is prescribed.
A healthcare provider is any individual or institution certified to provide health care services, including administering or prescribing drugs.
Insurance companies may set a quantity limit that applies to certain drugs as a form of utilization management. These limits set a maximum limit of coverage for units dispensed for each prescription during a specific period of time based on dosing limits approved during the drug approval process.
Rebates are payments made after sales in exchange for meeting certain conditions set forth in contracts between pharmaceutical companies and payers. PBMs or payers themselves negotiate rebates from manufacturers in exchange for a favorable formulary position, which often has the effect of increasing sales volume and market share. Although the majority of these rebates (generally ~90%) are returned directly to the payers, the PBMs typically retain about 10%. Rebates are rarely disclosed at the product level and have been a focus of calls for greater transparency in drug pricing. Although payers argue that aggregated rebates serve to reduce members’ premiums, they are rarely shared with patients at the point of sale.
Retail pharmacies dispense generic and branded drugs directly to patients.
The three largest retail pharmacies in the US in 2016, by total prescription revenues, were:
- CVS Health Corporation – $61.1b
- Walgreens - $56.8b
- Rite Aid Corporation - $19.0b
Specialty drugs address complex or rare diseases. They frequently require special care with regard to distribution, administration or patient monitoring/management. They are dispensed at specialty pharmacies, and may require prior authorization or other utilization controls before the prescription can be filled.
Specialty pharmacies dispense drugs where patient monitoring/ management or utilization restrictions are needed.
The three largest specialty pharmacies in the US in 2016, by total prescription revenues, were:
- Express Scripts, Inc. - $43.9b
- CVS Health Corporation – $35.3b
- UnitedHealth Group (Optum Rx) – $17.4b
Step edit or step therapy is a form of utilization management that requires patients to try other treatments on the formulary prior to being prescribed the specific product (frequently a more expensive specialty drug).
Utilization management includes techniques put in place on behalf of health insurers that manage reimbursement costs and assess appropriateness of care for individual prescriptions.
Wholesale Acquisition Cost (WAC)
WAC is a price benchmark used by certain state Medicaid programs and commercial insurers to establish drug reimbursement rates to pharmacies and other providers.
WAC is a manufacturer’s list price for a drug, to wholesalers or direct purchasers, not including discounts, rebates or other reductions in price. WAC is published by pricing publications based on information reported by manufacturers. See 42 U.S.C. § 1395w–3a©(6).
A wholesaler or distributor acts as a middleman between the pharmaceutical companies and the pharmacies and providers that dispense medicines to patients.
There are two types of wholesaler businesses:
Full-line wholesalers – for retail and outpatient settings
Specialty distributors – for inpatient settings (hospitals, doctors’ offices) only
The three largest wholesalers account for 85% to 90% of the distribution market in revenue: AmeriSourceBergen Corp. (ABC) $147.3, McKesson Corporation (MCK) $133.7B, Cardinal Health, Inc. (CAH) $97.4B.
340B Drug Discount Program
Eligible health care organizations receive discounted prices on outpatient drugs through the 340B Drug Discount Program, created in 1992. Eligibility is specified in Section 340B(a)(4) of the Public Health Service Act.
The 340B price (established under section 340B of the Public Health Service Act) is the maximum price that a manufacturer may charge for a covered outpatient drug sold to certain types of clinics receiving federal funding and safety net hospitals specified by statute (“covered entities”). The 340B price is determined quarterly by manufacturers using a statutory formula that is based on the manufacturer’s Average Manufacturer Price (AMP) and Best Price (BP) reported to CMS. See 42 U.S.C. § 256b.