Thursday, September 10, 2009

What Happens When AWP Goes Boom?

Enough about Obamacare -- let's talk about something closer to home.

In just 12 days, the Great 4% AWP Rollback begins. From what I hear, many pharmacies, PBMs, and health plans are adopting (or are negotiating) contractual “equivalency formulas” that will maintain constant dollar reimbursements to pharmacies. So I'll offer you a few thoughts on the post-September 26 situation.

Medicaid is another story and will likely mean real cuts. Unfortunately, this episode shows that it’s never too late to exaggerate the impact of a reimbursement cut.


I'm sure almost everyone is familiar with the circumstances here, but if not, read Farewell, AWP.

Briefly, the settlement of the New England Carpenters Health Benefits Fund, et al., v. First DataBank, Inc. and McKesson Corporation case requires First DataBank (FDB) to reduce the AWP mark-up from 1.25 to 1.20 times the Wholesale Acquisition Cost (WAC) for approximately 1,400 NDCs identified in the litigation.

Although the settlement doesn't require it, FDB plans to set the mark-up at 1.20 for all drugs independent of the litigation on September 26, 2009. This roll back of the WAC-to-AWP spread translates mathematically into a 4% reduction in their AWP.

FDB also intends to stop publishing AWP data no later than two years following the date that the rollback adjustments are implemented, i.e., no later than September 26, 2011. First DataBank has stated that it will continue to publish non-AWP drug pricing information, including WAC, Direct Price, and suggested wholesale price. Visit for more details.

Since payers still widely use AWP as a drug reimbursement benchmark for pharmacies, the settlement affects the economics of providers that were not directly involved in the lawsuit or settlement. Many pharmacy groups have been strenuously objecting to the settlement. In June 2009, NACDS and FMI filed another legal brief challenging the settlements that reduce AWPs. However, the United States Court of Appeals for the First Circuit upheld the settlement, paving the way for the 4% rollback will occur on September 26.

BTW, there’s still some dispute about how much pharmacies have benefited from the initial mark-up change back in 2002. Judge Saris was withering in her March decision, writing that “[T]hese pharmacies … were unjustly enriched when drug prices were fraudulently inflated during the scheme, yet they have not been asked to disgorge their profits.” (See Farewell, AWP.) Many pharmacists disagree with this statement, although I have not seen any hard evidence one way or the other.


Here are a few thoughts on the near-term outcomes.
  • The market will adapt and pharmacies will be OK. Despite any alleged “enrichment,” many participants in the private market seem to be recomputing so that there will be a limited impact on pharmacies. This should not be news to anyone. Don’t believe me? Then take the wayback machine to my October 2006 post Additional Comments on the AWP settlement, when CVS (among others) seemed confident of its ability to renegotiate. At the time, the plaintiff’s expert argued that market participants would *not* be able to renegotiate, although that view now seems incorrect.

  • AWP is not dead yet. AWP continues to be the most widely used benchmark for brand drug reimbursement. I presume that other publishers will step in to fill the gap left by First DataBank and Medi-Span. Thomson Reuters, which publishes the Redbook, already uses a 1.20 WAC-to-AWP mark-up in their AWP Policy. A source there told me that Thomson Reuters has no plans to change the methodology or stop publishing AWP.

  • We’ll always have WAC. Some public payers have already begun to shift to the alternative list price benchmark of WAC, such as the Department of Defense (Big WAC Attack). Nine state Medicaid programs already incorporate WAC into the ingredient cost reimbursement formula. Of course, WAC doesn’t necessarily represent the price paid by any entity within the distribution system either, so shifting to WAC just kicks the can down the road.

  • We still need a credible alternative. Personally, I think that dissatisfaction with list-price benchmarks will ultimately lead to reimbursement models based on actual transactional pricing data, such as the Caterpillar-Walgreens agreement. However, there is not yet a viable published “average price” available for payers to use in computations. Stay tuned for more on this topic.

Now we come at last to Medicaid, which consistently provides the most generous reimbursements to retail pharmacies for generic drugs. See this February 2009 OIG report or Pharmacy Profits and Wal-Mart for some evidence. (Hey, I don't make this stuff up.)

The government doesn’t move quite as fast as the private sector, so there’s little time to adjust the various state Medicaid prescription reimbursement methods. Also, states aren’t particularly motivated to act quickly given the potential budget savings.

How much is at risk? Well, I guess that depends on how close we get to the deadline.
  • At the August NACDS meeting, NACDS Senior Vice President and General Counsel Don L. Bell II estimated a $68 million reduction per year from Medicaid. (See page 3 of his presentation.)

  • In a letter this week to CMS head honcho Kathleen Sebelius, NCPA and NACDS cite a “conservatively-estimated loss of more than $350 million each year.” (See page 2 of their letter.)
Gosh, one month makes a big difference, doesn’t it? Good thing that it's only taxpayer's (our) money, right?

Regardless of whether CMS reacts, I hope that the OIG looks into whether pharmacies gained from the initial 2002 increase or would have lost (or did lose) from the 2009 rollback. Facts never hurt anyone.


  1. “[T]hese pharmacies … were unjustly enriched when drug prices were fraudulently inflated during the scheme, yet they have not been asked to disgorge their profits.”

    Hmmm....let's now go back and do a little review on the state of drug store PBM reimbursement from 1995 to current.

    1995: Average AWP discount was 11% plus $4.00 fee.

    2000: AAWP discount was 13% plus $3.00 fee.

    2005: AAWP discount was 15% plus $2.50 fee.

    2009: AAWP disc is 16% plus $2.00 fee.

    It seems to me that the "unjustly enriched" drugstore reimbursement market actually did an "automatic adjustment" without the help of Uncle Sam.

    Shocking, but it seems like the concept of competition actually works in America.

    He giveth, and taketh away. And it all washes out in the end!

    Thanks Adam.

  2. Humana and Aetna are using this settlement as an excuse to slash reimbursement to pharmacies. Their adjusted reimbursement rate does not even come close to being equivalent to the pre-settlement reimbursement, at least on independents contracts Now on the PBM front, who is overseeing to ensure that PBms do not use this as an opportunity to stick it to the health plans? More lawsuits in the future?

  3. Re: the declining AWP discount over time

    Keep in mind that AWP has been rising by 5-10% per year. A smaller percentage of a bigger number means more dollars for pharmacies. When I pointed this fact out last year (with computations), pharmacy owners went ballistic in the comments. See Pharmacy Profits & PBM Contracts and the comments from readers.


  4. 2 great posts in 2 days - I guess you couldn't wait to get back!

  5. I know that many are now looking to WAC to become the new pharmacy benchmark. However, what's to stop a manufacturer from increasing WAC arbitrarily to maintain pharmacy margins?

    WAC is just a list price and, as I understand it, not really tied to what a retail pharmacy pays for the drugs. If I'm a manufacturer and I want a pharmacy or a clinic to dispense my product, why wouldn't I raise my WAC while simultaneously increasing the discounts available to the channels?

    Your point is right on, Adam -- WAC is just more of the same, and we need a viable alternative based on real data.

  6. I reviewed a client’s “equivalency” calculation exhibits provided by one of the major PBMs and found many errors.

    I urge organizations to review these reports before agreeing to PBM-proposed changes in discounts from AWP. Larger organizations may want to audit PBM calculations based on their raw claims data.