Hi,

I have multiple purposes for starting this thread. First, I want to educate the public on drug pricing. The lack of transparency in healthcare has resulted in increased prices, confusion, and misguided solutions. My hope is that with more transparency comes a more informed public.

Second, perhaps selfishly, I want to feed my curiosity with the hopes of increasing my understanding of the healthcare market. Here it goes.  

Pricing for pharmaceutical drugs is complex and challenging to understand. The following is an attempt to identify the key pricing measures healthcare players use to determine the price. I have no idea how to order these terms.

ASP

ASP – Average Sales Price. The Average Sales Price is a formula used by Medicare to determine the reimbursement price to the physician of a medication billed under the medical benefit of Medicare (Medicare Part B). The Average Sales Price is the Average Drug Price sold to all purchasers, excluding certain purchasers.

What is included in the ASP calculation?

The Average Price includes volume discounts, prompt pay discounts, cash discounts, free goods contingent on purchase requirements, chargebacks, and rebates. ^[1] However, sales that are less than 10% of the average manufacturer price,^[2] sales to 340B covered entities,^[3] drugs provided through patient assistance programs and manufacturer discount programs,^[4] taxes and other fees that are passed to the purchasers,^[5] and international sales^[6] are not counted towards the ASP.

What drugs are covered?

ASP applies to drugs administered under the medical benefit (part B). A couple of factors determine whether Part B covers a drug. First, purchasing the drug must be reasonable and necessary for diagnosing or treating an illness or injury (incident to a physician’s service). [7] Medicare Part B covers drugs based on their type, route of administration, location of administration (office or home), and diagnosis.[8]  Generally, these drugs are administered in a physician’s office and not self-administered.[9]

Why is it Important?

CMS reimburses providers for the acquisition of qualifying drugs based on the ASP. Providers are compensated based on the drugs’ Average Sales Price (ASP), with an additional 6% to account for administration, storage, overhead costs, and a compensation rate.[10] The compensation rate represents a profit margin, a critical revenue stream for many providers.[11] The IRA increased the percentage of biosimilars as an increased incentive for their use. Providers are reimbursed for Biosimilars at 108% of the ASP as long as the ASP does not exceed the reference biologics.[12]

AMP

The Average Manufacturer Price is the average price a manufacturer charges to wholesalers or pharmacies that purchase drugs directly from the manufacturer and distribute them to community or retail pharmacies.[13] The definition excludes pharmacies that dispense primarily through the mail, nursing home pharmacies, long-term healthcare facilities, hospital pharmacies, clinics, charitable or not-for-profit pharmacies, government pharmacies, or pharmacy benefit managers.[14]

Manufacturers submit AMPs to CMS monthly and quarterly as a condition for participation in Medicaid.[15] Manufacturers must enter a rebate agreement with HHS and pay quarterly rebates to the State’s Medicaid agency.

What is the difference between ASP and AMP?

ASP represents the price physicians and providers pay for drugs (after discounts and rebates), which CMS uses to determine physician reimbursement rates. AMP is the price the manufacturer receives (after discounts and rebates) from wholesalers and retailers who buy the drug, which is used to determine Medicaid rebates.

Best Price 

Along with the AMP, manufacturers provide CMS with the “best price,” guaranteeing that Medicaid receives the lowest possible price.[16] A statutory formula determines Medicaid’s rebate amount. The Medicaid rebate amount is the greater of 23.1% of the AMP for a brand name drug or the difference between the AMP and the best price. The rebate amount for certain pediatric and clotting drugs is 17.1%, the difference between the AMP and the best price.[17] The rebate amount is 13% of the AMP for generic drugs (and no best price provisions). [18]

The rebates act as a floor price Medicaid will pay for drugs. If a manufacturer exceeds the floor amount, Medicaid receives the “best price” match. This provision may disincentivize manufacturers from offering significant discounts to private payors because of its impact on Medicaid prices. The “Best Price” also includes an inflationary penalty if the drug’s price rises faster than the inflation rate. [19] 

Remember that the rebates provided to Medicaid using the AMP and Best Price provisions are the federal statutory minimum for rebates. States could negotiate additional rebates by leveraging the drug’s placement on their formulary and PDL. Formulary and placements are outside the scope of this article.

AWP

The Average Wholesale Price (AWP) is a benchmark reference price used in the pharmaceutical industry. It does not represent the actual price pharmacies pay when purchasing drug products from wholesalers. Instead, it serves as a pricing standard in reimbursement calculations and contract negotiations. AWP is based on information from drug manufacturers, distributors, and suppliers. [20] AWP does not include the price after discounts or rebates. It is not generally paid, but the sticker price or starting point. [21]

AWP and WAC are initial prices that do not reflect actual prices paid. Where the WAC is a list price before any discounts are applied, the AWP is a reference price that is generally higher than the WAC price. The WAC is used as a benchmark for other calculations, and the AWP is used as a reference price to determine insurance reimbursements.

FCP (Federal Ceiling Price), FSS (Federal Supply Schedule Prices), and nonfederal average manufacturer price (non-FAMP)

The Federal Supply Schedule (FSS) establishes prices available to all direct federal purchasers, including the VA, DoD, PHS, and the Coast Guard. 38 U.S.C. § 8126(a)–(b).  The FSS is publicly reported after negotiations between the VA and the manufacturers. It allows direct federal purchasers to buy brand-name drugs at prices equal to or below the lowest price offered to their most favored commercial customers. The most favorite commercial customers receive the best price or biggest discount. [22] The penalty for not complying with this provision is that the drug company cannot receive payments from Medicaid, DOD, PHS, or Coast Guard. [23]

In addition to the FSS pricing scheme, the 1992 Veterans Health Care Act added additional discounts for the VA, DoD, PHS, and the Coast Guard.[24] The 1992 Act set a limit, known as the Federal Ceiling Price (FCP), on how much the federal government pays for pharmaceutical products. This limit is 76% of the average price charged to non-federal buyers, the nonfederal average manufacturer price (non-FAMP).

The Big Four Prices (VA, DoD, the Public Health Service, and the Coast Guard) are the lowest between the FSS and the FCP. Because these two programs combine, the VA receives the lowest prices for drugs, paying 55% of the average net price paid by Medicare.  [25]

MFN (Most Favored Nation)

Most Favored Nation pricing is a proposed policy that would set the reimbursement rate for drugs covered under Medicare Part B to the lowest price paid in specific foreign countries.[26]  The max reimbursement rate is the lowest price, after adjustments for volume and differences in national gross domestic product, that the manufacturer sells in a country that is a member of the Organization for Economic Co-operation and Development (OECD) and has a comparable per-capita gross domestic product.[27] The proposed policy would also apply a similar structure to Medicare Part D drugs, which have insufficient competition and prices above those in OECD member countries. [28]

Under the MFN model, providers would receive reimbursement for Medicare Part B drugs based on “MFN Drug Payment Amount” plus a flat “Alternative Add-On Payment.”[29] instead of the current model of 106% of the ASP. The Alternative Add-On Payment is a flat payment per dose, calculated as 6.1224% of a volume-weighted average of historical ASPs.[30]

MFN pricing is an attempt to lower United States drug costs and align U.S. drug prices to internation prices. This program was outlined in a 2018 International Pricing Index proposed rulemaking.[31] In 2020, the Trump administration attempted implementing MFN pricing via executive order. The courts granted a preliminary injunction blocking the implementation of the policy because the policy violated the APA. [32]

Net Price

Net Prices are the prices of drugs after the discounts and rebates. The net price is the price the plan actually pays for the drugs. Where a company’s gross revenue is based on the number of sales multiplied by the drug’s WAC price, a company’s net revenue is based on the number of sales multiplied by the drug’s net price.[33]

The pharmaceutical supply chain has multiple areas for price concessions, which determine the net price. Concessions that apply to Payers and PBMs are negotiated rebates and discounts, PBM admin/service fees, and government insurers like Medicare, VA/DoD, and Medicaid receive negotiated rebates and statutory rebates/discounts. Concessions are applied to channel participants through wholesalers, pharmacy fees, discounts, and GPOs. Providers receive concessions through the 340B program and GPO programs. Patients receive concessions through copay assistance programs and patient support programs. [34]

Net prices are generally confidential. However, many manufacturers have recently become more willing to disclose their net prices to increase transparency, shift public focus away from list prices, and highlight the actual cost of drugs. Disclosing net prices sheds light on the growing concern of the “gross to net” bubble (the increasing difference between the gross/list price and the net price).[35] For example, Jansens paid discounts and rebates of 58 cents on every dollar of our gross sales to insurers, pharmacy benefit managers, hospitals, government payers, and other healthcare entities.[36]  Another study found that Commercial discounts more than doubled as a share of gross sales, rising from 27.0% in 2012 to 60.5% in 2019. Mandatory discounts grew from 10.7% to 21.0%. Coverage gap discounts increased from 2.0% to 4.4%, Medicaid rebates from 7.4% to 8.6%, and 340B discounts from 1.2% to 8.0% over the same period.[37]

[1] 42 U.S.C. 1395w–3a (2)(C)(3)

[2] 42 CFR § 414.804(a)(3):

[3] 42 CFR § 414.804(a)(4):

[4] CMS Medicare Claims Processing Manual, Chapter 17, Section 20.1

[5] 42 CFR § 414.804(a)(1):

[6] 42 CFR § 414.804(a):

[7] MedPAC, Payment Basics: Medicare Part B (2024), https://www.medpac.gov/wp-content/uploads/2024/10/MedPAC_Payment_Basics_24_PartB_FINAL_SEC.pdf.

[8] Id.

[9] See Id. (In addition to physician-administered drugs, preventative vaccines, pharmacy-supplied drugs like oral cancer drugs and immunosuppressive drugs, inhalation drugs that require administration with a Part B nebulizer, certain home infusions drugs like certain intravenous drugs for heart failure and pulmonary hypertension, and clotting factor drugs.)

[10] IRA Medicare Part B Negotiation Shifts Financial Risk to Physicians, Nov. 29, 2022, Avalere, https://avalere.com/insights/ira-medicare-part-b-negotiation-shifts-financial-risk-to-physicians

[11] Id.

[12] Inflation Reduction Act of 2022, Pub. L. No. 117-169, § 11403, 136 Stat. 1818, 1899 (codified at 42 U.S.C. § 1395w-3a(c)(4)(B)).

[13] 42 CFR 447.504. A retail community pharmacy is “an independent pharmacy, a chain pharmacy, a supermarket pharmacy, or a mass merchandiser pharmacy licensed as a pharmacy by the State and dispenses medications to the general public at retail prices.

[14] Id.

[15] Sections 1927(a)(1) and (b)(1)(A) of the Social Security Act.

[16] Established by the Omnibus Budget Reconciliation Act of 1990 (OBRA ’90) (P.L. 101‐508). Amended by the Patient Protection and Affordable Care Act, 42 U.S.C. § 18001 et seq. (2010). 42 U.S.C. 1396r-8 (c)(1)(C). Best Price is “the lowest price available from the manufacturer during the rebate period to any wholesaler, retailer, provider, health maintenance organization, nonprofit entity, or government entity within the United States.” The purchase price from the Department of Veterans Affairs, the 340B program, the Department of Defense, the Public Health Service, and the Indian Health Service are excluded from the determination.

[17] Id.

[18] 42 U.S.C § 1396r–8(c)(3)(b)(iii)

[19] 42 U.S.C § 1396rr-8(c)(2).

[20] Gencarelli DM. One Pill, Many Prices: Variation in Prescription Drug Prices in Selected Government Programs [Internet]. Washington (DC): National Health Policy Forum; 2005 Aug. 29. (Issue Brief, No. 807.) Available from: https://www.ncbi.nlm.nih.gov/books/NBK561171/

[21] Id,

[22] See A Comparison of Brand-Name Drug Prices Among Selected Federal Programs  at

10–13, Cong. Budget Off. (Feb. 2021), https://www.cbo.gov/publication/57007.

[23] 38 U.S.C. § 8126(a).

[24] 38 U.S.C. § 8126(b).

[25] See A Comparison of Brand-Name Drug Prices Among Selected Federal Programs at

10–13, Cong. Budget Off. (Feb. 2021), https://www.cbo.gov/publication/57007.

[26] Lowering Drug Prices by Putting America First, Exec. Order No. 13,948, 85 Fed. Reg. 59,649 (Sept. 13, 2020).

[27] Id.

[28] Id.

[29] 42 C.F.R. § 513.210(a)

[30] Id. § 513.220.

[31] Medicare Program; International Pricing Index Model for Medicare Part B Drugs (Oct. 30, 2018)

[32] California Life Sciences Ass’n v. Ctr. for Medicare & Medicaid Servs., No. 20-cv-08603-VC, 2020 WL 7696057 (N.D. Cal. Dec. 28, 2020).

[33] Tales of the Unsurprised: U.S. Brand-Name Drug Prices Increased in January 2024, DRUG CHANNELS (Jan. 9, 2024), https://www.drugchannels.net/2024/01/tales-of-unsurprised-us-brand-name-drug.html.

[34] L.E.K. Consulting, Executive Insights: Refining Gross-to-Net Expectations for Improved Strategic Planning (2022), https://www.lek.com/sites/default/files/insights/pdf-attachments/refining-gross-to-net.pdf.

[35] Id.

[36] Janssen Pharmaceuticals, Inc., 2022 Janssen U.S. Transparency Report 6 (2022), https://transparencyreport.janssen.com/_document/2022-janssen-transparency-report-pdf?id=00000188-267e-d95e-abca-7e7e58750000#page=6.

[37] Dickson, Sean R et al. “Assessment of Commercial and Mandatory Discounts in the Gross-to-Net Bubble for the Top Insulin Products From 2012 to 2019.” JAMA Network open vol. 6,6 e2318145. Jun. 1. 2023, doi:10.1001/jamanetworkopen.2023.18145