Side Effects

AWP: Three little letters that could affect your wallet and health

Would you take this deal?

A shiny, new car can be yours for 80% off the average wholesale price.

Ready to sign on the dotted line?

Wait, you want to hear first what “average wholesale price” means?

If you must know, it’s not really based on much of anything, but we had to start somewhere.

What do you mean thanks but no thanks?

Sound absurd?

Actually, you’re probably already involved in this kind of deal, and you don’t even know it.

If you have health insurance — from your employer, your union, workers’ comp, Medicaid or Medicare — the price you’re paying almost certainly is based on a formula that relies in part on an “average wholesale price” for prescription drugs.

And it’s just as arbitrary and meaningless as the AWP for that fictional new car.

Even worse, experts say, having your health insurance tied to AWP likely leads to three fundamental shortcomings:

  • You are paying too much.
  • Your benefits are worse.
  • Your health likely has suffered.

123 times actual cost

Terrance Killilea, senior vice president of USI Insurance Services, has reviewed hundreds of contracts for prescription drug coverage over the years. He says the use of an arbitrary AWP is essentially universal.

“By and large, it's in everything you see,” said Killilea, who lives near Seattle.

The upshot?

“The impact of that variability is that you lack objective metric assessment of pricing going forward,” is how he put it.

Here is how Antonio Ciacicca put it: “This is all smoke and mirrors. Why are we using fake prices when we can use ones reflective of actual costs?”

He answered his own question. “I can tell you why: Because it protects the status quo and rips off payers,” said Ciaccia, co-founder of 46brooklyn, an Ohio-based nonprofit that specializes in researching drug prices, and top lobbyist for the Ohio Pharmacists Association.

To demonstrate the lack of credibility for the Average Wholesale Price, Ciaccia and his cohorts at 46brooklyn compared the AWP for numerous generic drugs against their actual cost, as determined by the federal government’s National Average Drug Acquisition Cost, which uses data from pharmacies nationwide.

Researchers discovered several examples in which the AWP was 50, 70, 100 times the actual cost of a drug. The most astonishing finding: a 10 mg tablet of the blood pressure medicine Amlodipine Besylate had an AWP 123 times its actual cost.

’You’re going to feel it’

Pharmacy benefits consultant Linda Cahn recently urged Ohio lawmakers to stop using AWP to determine what is paid for drugs though the taxpayer-funded Medicaid program and other state-run insurance plans.

“It’s a manufactured metric, not based on anything” and can be manipulated at will, said Cahn, a New Jersey attorney who founded Pharmacy Benefit Consultants in 2005.

“It’s not the average price, it’s not the wholesale price, it’s not the price you are paying,” Cahn said. “Manufacturers pick a price and AWP is based on that. …

“It has nothing to do with their wholesale price, it has nothing to do with what the drug may actually be worth. It has nothing to do with an average. It’s just their price. And it can be any price they want, and they can change their AWPs whenever they want. AWPs are constantly rising as a result.”

Cahn, who also has reviewed hundreds of contracts based on AWP, identified such potential pricing “mousetraps” in 2008.

The bottom line, she said, health insurers ultimately pass along higher costs to consumers or taxpayers.

“They're going to increase the deductible, they're going to increase the premium if a premium is being charged, they're going to increase the fixed co-pays, or they're going to move to co-insurance, or they're going to stop covering as many drugs, (and) if they’re the government, they just kind of absorb it and go into more and more debt,” she said.

“You as the consumer may not suffer initially from that change in the AWP price ... but eventually you’re going to feel it. We’re all going to feel it.”

Sometimes that’s literal. A Gallup Poll released two weeks ago found that a record 25% of Americans say they or a family member put off treatment for a serious medical condition in the previous year because of the cost, up from 19% the year before and the highest since Gallup began asking the question in 2001.

An additional 8% said they or a family member put off treatment for a less serious condition, bringing the total percentage of households delaying care due to costs to 33% — 1 in 3 Americans,

How it works

At the risk of oversimplification, the Average Wholesale Price goes through three basic steps before it gets to you.

First, manufacturers put a brand-name drug on the market and set the AWP. Few are critical of this step, since only the manufacturer holds a U.S. patent to and can sell a brand-name drug. So in this case, the AWP actually does typically represents the real price.

But once the patent on the brand-name expires, generics from multiple drug-makers appear on the market. That’s step two.

As you might expect with increased competition, when the makers of the generic drugs set an AWP, it’s cheaper than the one for the brand name supplied by just one manufacturer. What you probably wouldn’t expect is that almost everyone in this supposedly free market is that everyone winds up with roughly the same AWP, about 20% off the brand price. And that new AWP usually won’t change for years, despite market conditions that drive down the actual price of the drug over time.

Step three is when pharmacy benefit managers arrive on the scene. PBMs are middlemen in the drug-supply chain that likely negotiated the terms of your prescription drug coverage.

And that contract probably includes a section on calculating costs that says something like Average Wholesale Price minus 80%.

So, would you take this deal?

Unfortunately, there’s no good way for you to know whether you should. Even worse, the staff of your HR department — or in agencies administering government benefits — probably don’t know, either.

In contrast, and perhaps worst of all, the pharmacy benefit manager does know.

While the calculations they use might or might not give you a good deal, they assuredly will give the PBM one.

A consultant’s report last year on prices for prescription drugs in the taxpayer-funded state Medicaid program shows how the amounts can vary by retail outlets. The main PBM for the state, CVS Caremark, gave Walmart a discount of more than 91% off the price of generic drugs. But rival Walgreens got a discount of less than 85%.

A spokesman for the Pharmaceutical Care Management Association, a trade group representing pharmacy benefit managers, sought to distance PBMs from the much-criticized pricing model.

“Drug manufacturers alone set and raise drug prices,” said Greg Lopes.

No alternative

Ohio Medicaid Director Maureen Corcoran acknowledged that the concept of AWP is flawed.

“Yes, it's got too much randomness or too much variability in it. And the underlying concern is that it's not possible to get public information about what the drug costs are,” she said.

But Corcoran pointed to a factor that others cited as well: It’s essentially the only game in town. Despite its shortcomings, it’s the industry standard for Medicaid and the commercial market, and currently the state’s best option, she said.

Corcoran said she is looking at possible alternatives as Medicaid seeks more transparency and control over its prescription drug program by contracting directly with a single pharmacy benefit manager.

“I'm not going to sit here today and say we will never use an AWP. What I can say to you is we will have much greater control over the network, much closer visibility into what is necessary along the entire supply chain so that we can maintain the access that we need to have for the program.

“And that we can be clear that all these extra fees, and all these other kind of Whack-a-Mole things are not operating between us and the patients, and the pharmacies along the way.”

Miranda Motter, president of the Ohio Association of Health Plans, said the trade group for the health insurance industry has no position on AWP. She did, however, note that several requirements regarding the use of AWP are present in contracts between PBMs and the managed care plans hired to administer the state’s Medicaid program.

One safeguard requires use of a nationally recognized source of AWP information, such as Medi-Span.

Representatives of that company would not comment for this article. Medi-Span’s website says it uses “the same data that 96% of U.S. based PBMs use to process claims.”

But critics say while Medi-Span’s may list AWPs accurately, that matters little if the AWP itself is not valid.

The typical arrangement of AWP minus a certain percentage shows up elsewhere in government contracts, such as the Ohio Bureau of Workers’ Compensation..

“We do not pay 100% of AWP for drugs,” said bureau spokesman Kim Norris.

Instead, workers’ comp pays AWP minus 75.6% for generic drugs. The PBM must pay the pharmacy the same amount paid by the bureau and receives a flat fee of $15.50 per injured worker receiving prescriptions per month, regardless of the number of prescriptions or cost, she said.

Why change?

AWP has been acknowledged as a trouble spot since the early 1990s. A lawsuit over price-fixing based on AWP was resolved in 2009 that many predicted would lead to the demise of the concept. But virtually everyone in the drug-supply chain still uses it today.

Ohio pharmacists are among those not happy about the fact that AWP stubbornly lives on.

That’s because their contracts with pharmacy benefit managers also are based on AWP minus a percentage, meaning they’re not necessarily based on reality. It also means when “real” prices drop, as generics’ usually do, but the AWP doesn’t, they lose money.

“Unfortunately, this number is sometimes used to ’anchor’ pricing formulas set by PBMs,” said Pickerington pharmacist Nate Hux. “From a pharmacist's perspective, this is highly frustrating as AWP has everything to do with profitability and nothing to do with good or proper drug therapy.”

Max Peoples, who owns pharmacies in Westerville and Marengo, said, “The fact that there really is not one agreed upon Average Wholesale Price any more makes it easy for pricing and reimbursement manipulations. ... Simplification is what we need: One unique price for each part of the distribution process and then one pharmacy reimbursement structure would solve a lot of issues.”

The 2018 report by the Ohio Medicaid consultant concluded: “Findings do not indicate that the pharmacies were reimbursed adequately to be profitable.“

No one is saying the use of AWP is the only factor for the high drug prices you pay. In fact, no reliable cost estimate exists for using an arbitrarily inflated price.

But you might wondering: If AWP is so bad, why hasn’t anyone changed it?

We asked the same question.

The real answer, say experts such as Killilea, Cahn and others, is this: No one sees a real incentive to change, because everyone in the drug supply chain benefits financially from an artificially high AWP — except the one at the end of that chain: the consumer.