Friday, September 25, 2009

AWP Goes Boom

Tomorrow’s the day that First DataBank’s Average Wholesale Price (AWP) goes boom. See What Happens When AWP Goes Boom for background.

My view is that there's not going to be much of a difference after Sept. 26. As I see it, the net impact on total U.S. drug spending will be relatively small and certainly far below the initial multibillion-dollar predictions from a few years ago.

The Medicaid issue is more complex, but not fatal. So far, New Jersey has already announced a reimbursement change that will partly neutralize the impact. (See this NACDS press release.)

And as for the future of AWP? I'm still skeptical that this benchmark will survive too much longer.


A few people have emailed me claiming that the rollback will be a windfall for Pharmacy Benefit Managers (PBMs). This makes no sense.

Since everyone has known about the change for at least 3 years, many plan/PBM contracts already have economic neutrality language. Health plans and employers are not so naïve or unsophisticated that they would allow their PBMs to reap the benefit of the rollback without sharing the savings.

The pharmacies are also likely to emerge mostly unscathed. The chain pharmacies have been talking publicly for a few years about negotiating language related to benchmark shifts. The Pharmacy Services Administration Organizations (PSAOs) already have—or should have—negotiated similar language with PBMs on behalf of independents. More than 80% of independent pharmacies rely on PSAOs to negotiate their third-party contracts and manage claims payment.

Here’s a representative comment from the recent Dow Jones story Drug-Benefit Cos Said Adjusted For Price Rollback:
Thomas Moriarty, general counsel for Medco Health Solutions Inc. (MHS), said, "A number of years ago we began to address this potential matter in our client contracts with the goal of it being essentially economically neutral" for the company and its clients. What Medco charges customers and pays retailers is adjusted along with the benchmark, he explained. "This is an arithmetic change that is going on." (emphasis added)
Healthtrans, a “privately held healthcare management solutions company,” even went so far as to issue this press release yesterday announcing their adoption of Wholesale Acquisition Cost (WAC).


My comments in What Happens When AWP Goes Boom still hold true regarding Medicaid. States aren’t particularly motivated to act quickly given the potential cost savings from a rollback.

The NACDS announced that New Jersey will restructure their brand reimbursement to AWP minus 15%, which translates to a 1.2% increase in the amount paid. NOTE: Please see clarification from David Schwed below.

But let's keep things in perspective. Medicaid’s total federal, state, and local spending on outpatient prescription drugs was estimated at $20.7 billion in 2008—about 8% of national pharmacy revenues. Pharmacies with significant Medicaid business will feel the effect, but the overall impact will not be a meltdown of the pharmacy market, especially in states using WAC.



  1. Great update, Thanks, Adam

  2. David Schwed RPh FAPhA FACASeptember 25, 2009

    As the initiator pharmacist-owner/payment consultant for GSPO and NJPhA to NJ Medicaid on the AWP settlement issue, I'd first like to thank the other members of the NJ Pharmacy Coalition for their valued assistance to GSPO and NJPhA in this effort to maintain pharmacy access to affected state program beneficiaries. I'd like to clarify that NJ has not agreed to a unitary AWP adjustment; rather the state fiscal agent will examine each claim to the NDC level and adjust to the pre-settlement level. Since the pre-settlement AWP varies from NDC to NDC in relation to WAC, the adjustment percentage will vary.

    The official notice reads: "Reimbursement for pharmacy claims with service dates on or after September 26, 2009 and prior to July 1, 2010 shall be based on the Estimated Acquisition Cost (EAC), as described in the State Plan, plus a transitional payment amount that shall not exceed the difference between 1.2 times the Wholesale Acquisition Cost or Direct Price for those drugs, for which the First Data Bank (FDB) reference drug file Average Wholesale Prices (AWPs) are derived on a mark-up basis and the EAC. The transitional payment amount shall be calculated by National Drug Code (NDC) for only those drugs whose FDB AWPs are derived on a mark-up basis. The EAC plus the transitional payment amount shall be budget neutral and based on the changes in AWP supplied by FDB on or after September 26, 2009."

    The quote attributed to NACDS concerning the Brand AWP adjustment is incorrect. Both brand and generic payment has been at (old) AWP minus 16% since July 1 and will not change.

  3. David,

    Thanks for the clarification. I made a note in the blog post.


  4. Today, the NCPA publicly acknowledged that PBMs have adjusted contracts to account for the AWP rollback.

    They also plan to "go after" states that do not adjust Medicaid formulas.

    See Biding Time, Buying Time


  5. How come we didn't see this much activity when they originally increased the AWP?

  6. To answer Anonymous, above, because the AWP shift was applied without fanfare and though pharmacy bottom-lines were momentarily improved, payors quickly adjusted it out of the system by AWP regressions. If you think there's activity now, just wait. States who choose not to adjust will lose providers in low-income areas, a politically unpalatable result. This opinion is not anecdotal. I know how anemic my own pharmacy's bottom line has become over the past 12 months and how seriously I've considered exit strategies. Adam, you might want to consider that we are at the end-times for margin erosion. Foolish pharmacists have for years chosen to accept contracts which only make sense as incremental business. The water balloon has a leak; a big one. Core business margin from cash and public programs that previously covered overhead have diminished dramatically. CMS is pushing states to adopt payment strategies for Medicaid based on "average" reimbursement at -16.1% and 1.73 fees. Bottom line: Unsustainable at retail or mail (if mail pricing is transparent).

  7. The AWP rollback will cause margin reductions for retail pharmacies. With few exceptions all state Medicaid programs will "keep" the savings and several PBM's and health plans are taking advantage of the settlement to reduce reimbursements to retail pharmacies.

    By the way, your insight, comments and reporting is excellent.


  8. I love Wellpoint's revenue neutral reaction to the rollback, check your reimbursement, they are keeping the 4%...60 Aciphex 342.39 was 356.60...90 Coumadin 2.5 89.49 was 93.16...30 Tricor145 109.45 was 113.95...120 Norvir 1026.05 was 1068.75.. every brand name rx they are keeping the rollback, mac reimbursement remains the same, other pbm are neutral give or take a few cents, except this one.

  9. In fact, during an analyst conference call, CVS Corp. President and Chief Executive Officer Tom
    Ryan asserted that if the AWP is adjusted significantly, CVS will renegotiate its PBM contracts "to avoid any significant margin impact."

  10. let me get this straight, drug prices are going down because the formula previously used to set them was secretly manipulated so that payers were getting shafted for years, and in response to the court ordered remedy seeking to address that wrong, the pbms and pharmacy are devising a scheme to keep the prices at the wrongfully inflated levels, and they have the nerve to label that scheme "revenue neutrality"